"There's no trick to being a humorist when you have the whole government working for you." -- Will Rogers Will Rogers would have felt right at home today as a financial commentator: Not only would he have numerous governments in his employ, he would be able to enlist the services of the entire Wall Street community as well. Even more so than in government, some in this crowd believe error, illogic and a near-reckless disregard of available data can be elevated to an exalted state envisioned in the dreams of religious mystics. As promised in a Columnist Conversation post last week, two questions stand before the house today: whether a weaker dollar should close the U.S. current-account deficit, and whether the current-account deficit bears any relationship to the fortunes of the U.S. equity markets. The answers are no and no. A lesser question, whether a current-account deficit of zero -- or for that matter a budget deficit of zero -- should be goals of national policy was answered in the negative in this space in December 2003 . The questions of whether the Federal Reserve should target the dollar and whether weak currencies imply weak equity markets were dismissed similarly in November 2004.
A Good Idea at the Time
Before the early 1970s, exchange rates were fixed either to each other, to a reserve currency or to gold. The post-World War II regime established at the Bretton Woods conference in 1944 fixed the U.S. dollar-gold rate at $35 per ounce. Other currencies would be fixed against the dollar once they became convertible following the damage from the war. A characteristic of a fixed exchange rate system is that a country in perpetual deficit eventually depletes its reserves of either gold or convertible currencies and must limit its imports to whatever is provided by vendor financing. In such a system, periodic crises ensue and the occasional devaluations or revaluations of currencies become market-jarring events.