The Time Is About Right For King Dollar
by Bob McTeer
September 15, 2014
Earlier in the recovery from the Great Recession, Larry Kudlow and most of his TV guests used to call for a strong dollar, ”king dollar,” in fact. A healthy economy needs a strong dollar. My response was that yes, in normal times, a strong dollar is good, but these aren’t normal times. We are trying to pull out of a deep recession, and a strong dollar would be a major headwind.
I used to invoke St. Augustine and paraphrase him on the topic of chastity. His prayer was, “Lord, make me chaste, but not just yet.” Mine was “Lord, give us a strong dollar, but not just yet.” Its time will come. Well, apparently its time has come. Financial TV has been abuzz lately with talk of the rise in the dollar in the past few weeks. I don’t know whether our underperforming economy is primarily cyclical in nature, and thus subject to improvement from good policies, or whether it is more structural in nature. Either way, its worth the risk in my opinion.
Of course, the strength of the dollar is overstated by financial TV’s favorite dollar index, the DXY. As I’ve written here before, the country trade weights used for the trade weighted DXY are very unrepresentative of our actual trading relationships. It doesn’t even include China and Mexico, two of our largest trading partners. It overweights Europe and the Euro-zone. Therefore, to a great extent, the apparent strength of the dollar is better viewed as weakness of the Euro.
With the euro zone on the cusp of a new downturn and potential deflation, the last thing Europe needs is a strong Euro. That is well understood by Mr. Draghi, head of the ECB, and weakening the Euro appears to be part of his stimulus efforts. Give them a strong Euro, but not just yet. Japan is another country that can ill afford a strong currency just now. It must risk inflation to end deflation and things aren’t going very well so far.
The confusion over whether a strong currency is good or bad for the economy confuses needing more aggregate demand to more fully utilize unemployed resources (pull out of a recession) with needing a strong dollar to maximize the purchasing power and real income of your citizens. Unfortunately, many recognize the former as a “Keynesian” position and thus dismiss it as such.
This fear of being called a Keynesian is silly. I was once in a three-way telephone conversation with a friend and his son. They were debating some economic issue, and, in frustration, the son called his father a Keynesian. Heavens! Think of the Keynesian position as a special case–as a handbook for getting out of recessions, which is what his General Theory was all about. Once out, you can leave his book on the shelf, including the implications for King dollar. We are almost there.