America and the Future of the Dollar

The United States has, arguably, the most competitive economy in the world. Its long-term demographic situation— and thus its long-term fiscal situation—is healthier than that of its major global competitors. Yet the dollar just keeps tumbling. How can this be? Economist Allen Sinai of Decision Economics gives a laundry list of reasons—some short term, some long—for the slow-motion plunge:

1) A "recession" economy

2) Further sizable declines in short-term interest rates compared with firm to even rising interest rates elsewhere

3) Domestic economic, political, and geopolitical uncertainties

4) The declining attractiveness of the United States as a place in which to invest

5) Shifts in currency flows against the dollar on changes in the global lineup of strengths and weaknesses in various countries' economies and wealth.

In the near term, Sinai concludes:

The decline of a currency is one of the adjustment mechanisms for an economy in recession.... In such a situation, policymakers will typically accept the declines because of its help on exports and the current account, and tolerate the inflation that can be a byproduct.... A strong dollar is the goal for the long-run, but not for the short-run given the deteriorating economic situation in the U.S.

Yet the dollar's prospects in the long run, Sinai concludes, aren't so hot either:

An informal array of alternatives has arisen. These include the Euro, Pound-Sterling, Yen, slowly the Chinese Renminbi, and some other currencies such as the Canadian and Australian dollars. Increasingly, commodities, such as gold and crude oil, are being bought as a store of value and a dollar alternative...Ten years from now? By then, formalization of the de facto exit of the U.S. dollar as the chief global reserve currency is likely.... The best bet is that a more formal currency basket will emerge...likely a cross-section of a limited number of strong currencies from the limited number of powerful countries. Of course, the dollar would be included, but much less so than before.

My take: If the rise of global currency competitors to the greenback is the price we have to pay for globalization, for a more peaceful and prosperous planet, then so be it. But we can certainly do our darnedest to make the American economy more productive and make America a more attractive place in which to invest and do business.

Imagine what the dollar would do if global currency traders glanced at CNBC one morning and saw the American president, surrounded key congressional leaders, standing in front of a podium at the White House—and then heard the nation's CEO says the following: "A strong dollar has long been a symbol of America's economic strength and vitality. So shall it be again. To that end, the White House and Congress have agreed to the following: first, a plan to make Social Security forever solvent without massive tax increases; second, the elimination of investment taxes for middle-class folks and a 50 percent cut for wealthier Americans; third, a limit in the growth of nondefense spending to the prevailing inflation rate minus 1 percent; fourth, a ban on all earmarks; fifth, a cut in the corporate tax rate to 25 percent; sixth, the creation of government-funded innovation prizes to help meet our nation's grand scientific challenges; seventh, linking federal higher education funding to schools' ability to produce many more skilled scientists and engineers. Hey world, check us out!"

I don't think I would want to be short the dollar that day. (If anyone has suggestions about how to boost the dollar and economy in the long term, please put them in the comments section.)