The value of the dollar is going to be strong for at least the near term, and it's time American leaders, economic and political, accept that fact.
The Federal Reserve has not yet accepted this fact, and, consequently, is having a devil of a time trying to construct any kind of coherent monetary policy in the current environment. If the United States raises interest rates, the value of the U.S. dollar strengthens, but if the United States does not raise rates or threatens to lower them, many other central banks are ready to cuts their rates lower so that the value of the U.S. dollar will not fall. And, if the United States is going to remain one of the strongest countries in the world, the Fed is going to find that it will have to change how it thinks and acts.
The U.S. dollar did not achieve this position intentionally. In fact, for much of the latter part of the twentieth century American leaders, Republican and Democratic, acted in a way that weakened the value of the dollar. Now, with much of the world living through the consequences of fifty years fiscal and monetary largesse, the United States finds its economy out-of-sync with many other countries leading to economic policies that are at odds with one another.
In devising its policy, the Federal Reserve follows objectives set for it by the U.S. Congress: "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."
The problem is, that the understanding of the world when these objectives were set is changing. Monetary policy constructed under the old understanding -- the Keynesian model with controls on the flow of international capital -- is just not going to work. And, that is what we are observing.
The U.S. dollar is the world's currency. It is No. 1 in trade and, as has been recently reported, it is the No. 1 safe-haven in the world. Given the openness of world capital markets, whatever the United States does, monetarily or fiscally, it is going to have international, as well as domestic, repercussions.
And right now, the world wants the U.S. dollar to remain strong.
And, for its own good, the United States in the future is going to want the U.S. dollar to remain strong. Changes in the world, especially the rise of China, is going to required the United States to achieve a strong economy and a strong currency.
Monetary policy is going to have to be released from efforts to support employment. Maintaining the value of the U.S. dollar is going to have to become its main objective. High levels of employment are going to have to be achieved through education, training, health care, diet, and other means of building and supporting the population.
Fiscal discipline is going to have to come back into fashion if for no other reason than the fact that quick-fix, fiscal stimulus schemes do not solve the employment problem, only longer-run programs that are fiscally sound, and serve to build up infrastructure and support innovation and productivity growth do.
It will only be through innovation and productivity growth that the nation becomes stronger and the United States retains its position within the world.