Celebrate the Strong Dollar

We are already seeing articles bemoaning the strong dollar as somehow a threat to the American economy.  Don't believe it.  Maintaining a weak dollar is yet another crony government program that benefits a tiny minority of admittedly vocal and politically connected Americans.

First, a bit of an aside.  It is amazing to me that the US dollar can be strong at all right now, given the actions of the Fed.  With its near infinite QE and zero-interest rate programs, one would expect the dollar to be weak (Oversimplifying, driving down the returns on financial assets reduces the overseas demand for them, thus reducing the demand for dollars, driving down the price of dollars).  But it turns out that the rest of the world (esp. Japan and the EU) are actually working twice as hard to trash their own currencies (they are actually heading into negative interest rate territory, not just zero) and thus on a relative basis, the dollar is stronger.

Companies that export or compete a lot with manufacturers in other countries hate the strong dollar.  It makes their domestically produced products more expensive vis a vis products manufactured in other countries.  Many of these companies have powerful political voices, and some have large unions with even more powerful political voices.  They lobby for a weaker dollar.  Part of that lobbying is often to portray other countries as nefariously "manipulating" their currencies to hurt the US.

What these countries that are weakening their own currencies are actually doing is trashing the prosperity of the vast majority of their citizens to protect the earnings of a few politically powerful producers.  Japan is a great example.  Japan is a country in which consumers have been stomped on from decades in order to reduce the price of the country's exports.  Japanese consumers pay far more for everything than we do, all so their exporters can lower their prices in the US.

This is the same in China.  We frequently host visiting Chinese students.  You know what every one of these kids do on their trip to the US?  They bring an empty suitcase that they fill up with electronic and fashion goods they buy here, many of which were actually manufactured in China  (I have never, ever have hosted a Chinese student that did not buy at least one Chinese-manufactured iPhone here).

So, we must oppose this currency "manipulation" that impoverishes Japanese, Chinese, and European citizens in favor of giving much lower prices to Americans -- Why?

We should celebrate the strong dollar.  It makes every one of us richer.  Not just when we buy Chinese electronics, but even when we buy American-made products that now must be less expensive to compete with foreign products and which benefit from cheaper inputs in their own manufacturing.

Years and years ago I wrote a hypothetical post about Chinese interventions to maintain a trade surplus form a Chinese consumer's perspective in a post from our sister publication Panda Blog.  I think it holds up really well.  It said in part:

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.


  1. bloke in france:

    Accusations of dumping are usually based on the monopoly power when everyone else is driven from the market, but cornering the market is hard. Just ask the Hunts about silver.
    The US has some "exhorbitant privilege" because most goods are traded in dollars, as they used to be in pounds. But while I would like a weak dollar to make it cheaper to fill my tank, this doesn't work either, weaker dollar equals more demand in euros, etc.
    while I'm dubious about efficient market theory in theory t does seem like currencies do wobble about some pole of economic reality. Except when politicians get involved.

  2. mesaeconoguy:

    (they are actually heading into negative interest rate territory, not just zero) and thus on a relative basis, the dollar is stronger.

    They are already negative – Swiss deposit rates at the Swiss central bank are negative, and German bunds sold at negative interest rate in Feb.


    The primary driver of the strong dollar has been the previously demonstrative Fed language about imminent rate rises, which are now pushed back until at least Sep. with the horrendous Q1 GDP number today.

    Don’t look for a strong Q2 GDP number either, which will further dampen rate rise expectations and subsequent dollar strength.

  3. Todd Ramsey:

    Warren, I am a huge fan. I agree with the substance of this post. I used to believe as you believe, that the near-infinite QE would produce inflation and weaken the currency. Scott Sumner has re-introduced "new" ideas that seem very plausible. I think you would be interested: http://www.themoneyillusion.com/?p=20599

  4. David Zetland:

    Thanks for pointing this out. It's well known that weak currencies help exporters and harm consumers among "neoliberal economists" but politicians and liberals seem to miss those forces all the time. A pity for the poor.