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.

Remember, we had a weak dollar in the 1970s and that wasn’t good for working people either. The reason a weak currency doesn’t work and would be a bad policy for the United States now is it raises the cost of capital. Countries that have a weak currency or a weakening currency have high interest rates and low levels of investment. So they simply don’t keep up with competitiveness in the world economy and they quickly lose jobs. They have a higher unemployment rate than the United States.

So the solution isn’t a weak dollar but it’s also not the ever-strengthening dollar policy. I’m trying to find a third way, which is for a strong and stable dollar.

If we did that, it would be a huge stimulus for the world economy because we wouldn’t have everybody having to decide what the currency aspect of their investment is going to be. To European investor, even a 2 per cent return in the United States is better than a 10 per cent return in Europe because of the exchange rate - and that’s disturbing to the world growth rate.

Greenspan could carry out this policy. I disagree with some of the view that the dollar might suddenly rolling over and go weak. It’s clear the U.S. economic fundamentals are stronger than those of our trading partners, so it’s relatively easy to have a stable dollar in this policy without it suddenly, somehow, becoming weak. There’s huge credibility in the US Fed, and that can withstand any sense of losing control of the currency.

On the problem of economic fundamentals as a basis for exchange rates - that I question.

If you say your currency is connected to your economic fundamentals, it causes volatility in the currency. As your economy heads down, if your policy is one that your currency should weaken while your economy is heading down, it causes you to go down faster. And Europe’s been finding this problem. The more they say their currency is related to economic fundamentals, as they slow down, you want to get out of the euro because their policy is one that their currency follows the slowdown. And the opposite is true of the United States.

As we said in the 1990s that we wanted a strong and stable dollar, and as we now say we want our currency to be related to the economic fundamentals, the US fundamentals are hugely better than in Europe and Japan.

To give you a distinction - and I’ve written a lot about this - why Europe can’t really use that concept - economic fundamentals - the US has a population growth rate. Europe has a population that’s near to declining. The US has a government sector that’s 30 per cent of GDP and a private sector that’s 70 per cent, whereas Europe has a private sector that’s only 50 per cent of GDP. So the US potential growth rate is much higher than Europe’s and that means that our economic fundamentals will be perpetually better. The more Europe says they want the currency to go with the economic fundamentals, the more it trends down. And I expect that trend to continue.

So the economic fundamentals idea causes volatility in the currencies. It decreases investment and, therefore, slows the world growth rate down.

I think the solution is a policy of strong and stable currencies, and each central bank is fully able to do that without causing weak currencies. I want to be clear: there’s a third way here. You don’t have to be either for a weak currency or a strong currency. You want to be for a stable one.