What is the significance behind the dollar being one of the strongest, if not the strongest, currency in the world?
This question is on many people's minds.
However, a strong dollar is only a problem to the world if it is viewed through the lens of the economic theory of the last century.
Actually, the U.S. hasn't really set out to achieve a strong dollar.
Although Federal Reserve leaders and Treasury secretaries have always said that they support a strong dollar, since the early 1960s, this hasn't really been the way the U.S government has behaved.
The government's efforts at financially engineering the economy to achieve high levels of employment first resulted in the U.S. breaking with the post-World War II international money system in August 1971. It then produced a secular decline in the value of the dollar from the early 1970s through April 2012.
The rise in the value of the dollar since then has only been due to the fact that most other economies in the world were performing worse than the U.S., not because the U.S. was working to achieve a stronger dollar.
Yet the strength of the U.S. economy since the end of the Great Recession has been modest, with gross domestic product rising at an annual compound rate of growth of 2.1% through the third quarter.
And, the weakness of U.S. growth has been attributed by many economists to the slowdown in the growth rate of labor productivity and not the absence of stimulative monetary and fiscal policies.
So the question about achieving faster economic growth seems to be the structural one of how a country goes about reviving its growth in labor productivity, not about new schemes to "goose" aggregate demand.
Here is where the strength of the dollar comes in.
We don't want the dollar to be strong because the economic growth of all other nations is so weak. We want the dollar to be strong because the economic growth of the U.S. is stronger than that being experienced in the rest of the world.
And strong economic growth, in this sense, comes from an effective, efficient and strong economy, one in which labor productivity is advancing and capital utilization is at high levels.
Unfortunately, an effective, efficient and strong economy doesn't come from governmental financial engineering, where the expansion of credit remains within the financial sectors of the economy and doesn't spill over into the industrial and manufacturing sectors.
Fifty-five years of financial engineering on the part of the federal government has gotten us to where we are now. This is captured in the fact that it caused the government to float the value of the dollar in 1971 and to the 37% decline in the value of the dollar against major currencies between January 1973 and April 2012.
If the government helps get labor productivity increasing at levels that are consistent with longer-term growth rates around 3% to 3.5%, as was the case in the 1950s and 1960s, then the value of the dollar will increase.
But goods and services produced in the U.S. will thrive because the increases in productivity will mean that what is produced in the U.S. will be among the most competitive offerings in the world.
The U.S. won't be competing with cheaper and cheaper goods as happened in the second half of the 20th century. It will be competing because of the greater quality of the goods being produced.
The government's change in focus will be from financial engineering to educating and training the labor force and to infrastructure such as health care and information technology as well as bridges and highways.
These latter efforts, however, can't be just short-term attempts to stimulate the economy and create more temporary jobs. They must be aimed at the longer-run structure of the whole economy.
In this world, the government's efforts to restructure the economy will result in a strong dollar, but it will also result in a productive and strong economy that can compete with any other in the world.
This is the kind of strength that the U.S. needs to build on.