We can't sustain a strong US dollar without strong foreign currencies

Our current policy is not only a strong dollar policy. It’s really been a strengthening dollar policy.

By going into the rhetoric now of the dollar responding to economic fundamentals, you almost lock yourself into an ever-strengthening dollar because, when are we ever going to be at a time when we admit that the United States doesn’t have good economic fundamentals? So the more that you say that the currency is supposed to go with economic fundamentals, the more you’re politically locked into an ever-strengthening dollar. And I think that causes quite a bit of problems.

I do, however, expect the dollar to go stronger. Our policy seems to be one of ever-strengthening, and I expect that to work, meaning the dollar going even stronger than it is right now. And so I’m concerned about both the strengthening - meaning the effect of that always being stronger dollar - but also the policy. In other words, people have to start planning on the dollar being stronger next year and the year after and the year after. And that starts causing some problems.

Before we go on with that, let’s recognise also that it’s not only the dollar that’s strong and strengthening. The yen is pretty strong, and the euro is pretty strong. Commodity prices are falling in Japan and in Europe, and so there can be a situation where several currencies are all strong or strengthening.

In the 1970s we had a situation where several currencies were weak and weakening. The dollar was weak but so was the mark and so was the Japanese yen. The commodity prices were rising rapidly and everyone had an inflation problem. So it’s not only a problem for the dollar, but we also have difficulties in Japan and Europe with the current state of affairs.

It’s important to connect the ever-strengthening dollar to the decline in prices for cotton, for commodities in general, going on in the world. We’ve got a change in the value of the unit of count and so we have a decline in the prices of things, and that decline is spreading. We’re seeing it in commodities but it’s penetrating various real estate markets. It penetrates the stock market, and so on. It also distorts investment decisions. So one of the problems is, if you’re making a decision between Europe and the US, you not only take into account which project is better, but you take into account which currency is better.

If you’re thinking about investing, you have to say: boy, it’s an ever-strengthening dollar. Part of my total return is putting that investment into the United States.

Here is a situation when the currencies are moving as they are on a trend that distorts the choice of investment beyond what would happen in the markets. It distorts trade, of course, and it also causes debt problems. If I borrow money today and then that currency strengthens, it makes it very hard for me to repay it next year. So a chunk of Japan’s debt problem is the yen, for so many years, had been strengthening, and so it makes it very hard to repay the debts that were taken out under a weaker currency.

In sum, the concept of an ever-strengthening dollar, on top of a strong euro and a strong yen, and falling prices - is at the core of the global slowdown. So we do have a problem. But as I said before, I’m not for a weak dollar.

So, what is the right approach?

The right approach, it seems to me is a strong and stable dollar, and the right approach also is a strong and stable euro and a strong and stable yen. Those are not inconsistent. We can all have stable currencies against one another and they’re all already strong. So it’s a sensible landing spot for the world to try to achieve.

I think Secretary Rubin should have done it and could have. He had the strength to make that policy change - not for trade purposes. It’s not to stop the trade because a lot of what we’re recording as currency problems in the manufacturing sector is just the natural evolution. It’s the change going on in those sectors that will go on under whatever the exchange rate is. But I think the reason is to get more global growth. That way, there would be more buyers for automobiles and for cotton products and so on. And so, I think Secretary Rubin could have done it.