Dollar Woes
What the president's reelection strategy means for the dollar and the economy.
by Irwin M. Stelzer
02/24/2004 12:00:00 AM
URL:http://www.weeklystandard.com/Content/Public/Articles/000/00...
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The descent of the dollar could also be slowed, and eventually halted, if the Federal Reserve Board's monetary policy gurus would raise interest rates. That would make dollar assets even more attractive to foreigners, and increase their demand for the dollars needed to buy those assets. But the Fed has announced that it will be "patient" before raising interest rates. So no upward pressure on the dollar will come from the Fed.
Another possibility is that the European Union would cut the U.S. trade deficit by adopting reforms to stimulate now-moribund European domestic demand. The European Central Bank could lower interest rates and end its ridiculous efforts to force recession-ridden countries to raise taxes or cut spending, and the German and French governments could reduce incentives to remain on the dole rather than work. That would put money into the pockets of Europe's consumers, enabling them to buy more made-in-America products, cutting the U.S. trade deficit, and reducing the downward pressure on the dollar. But that won't happen either.
Finally, the president and the Congress might agree to attack the federal deficit, now crowding an astonishing 5 percent of GDP. But Bush has decided to have guns, butter, tax cuts, an expanded welfare state, and a trip to Mars, while the Democrats want to end some of the tax cuts (the ones that benefit "the rich") and spend less on guns, but only so that they can spend more on education, health care, roads, and anything else that might attract a vote or two.
So, as with Eurloland reform, when it comes to trimming the federal deficit, that old New York phrase, fuggedaboutit, summarizes the prospects.
That means that the federal budget will continue to stimulate growth in America, which in turn means that our demand for the goods of the world will remain strong, our trade deficit high, and our currency weak.
FOR BUSH, a weakening dollar is far preferable to the protectionist measures the Democrats are calling for. John Kerry, who at this writing appears to have the Democratic nomination sewed up, once voted for the North American Free Trade Agreement (NAFTA). That was before the pestilent presidential bug bit. Kerry now says that it is "unpatriotic" for American companies to shift jobs overseas, that corporate taxes should be higher for such companies than for "patriotic" companies, and that we should insist that our trading partners raise their labor and environmental standards--read, "costs"--to equal our own. That, of course, would end the cost differences that make international trade so wealth-creating and efficient.
So decline the dollar may. But it won't collapse. Foreigners still want to put their money into dollar assets. The U.S. Treasury reported last week that net capital inflows from foreigners averaged $59 billion per month last year, up from $48 billion in 2002, and more than enough to cover the dollar outflows associated with the trade deficit. The dollar may not be as mighty as it once was, but it is far from puny.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
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