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

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.