Is the Dollar
Still Falling?
By Robert Pollin
07 October, 2005
Counterpunch
In
his classic work, The General Theory, published in the depths of the
1930s Depression, John Maynard Keynes famously observed that "Speculators
may do no harm as bubbles on a steady stream of enterprise. But the
position is serious when enterprise becomes the bubble on a whirlpool
of speculation. When the capital development of a country becomes a
by-product of the activities of a casino, the job is likely to be ill-done."
Keynes's Depression-forged
insights have been routinely reaffirmed over the subsequent 70 years
of global capitalist history, not least during the current movements
of decline, revival, and renewed drop in the value of the dollar in
global currency markets. And as Keynes emphasized, the main issue here
is not merely the behavior of financial markets, which never has been
more rational or socially redeeming than Las Vegas or Monte Carlo (as
was obvious during the Wall Street bubble years under Clinton). The
real issue is rather how the behavior of financial markets define the
limits of acceptable economic policies about things that matter well
beyond the confines of the casino, like unemployment, the distribution
of income, and the economic possibilities for our children.
In a piece last
April in CounterPunch, I wrote that "Between January 2002 and December
2004, the dollar fell by 34 percent relative to the euro, and 22 percent
relative to the Japanese yen. The prospect is for the dollar to keep
declining at least through 2005." I was accurate then in describing
what the prospect had been at that moment. But in fact, between April
and August, events have rendered that prospect increasingly uncertain.
Between May 1 and July 1 of this year, the dollar rose by 7.7 percent
against the euro and by 6.3 percent against the yen. Then, between July
4 and August 15, the dollar fell back by 3.7 percent against the euro
and 2.1 percent against the yen, before rising again to roughly their
July levels by October 1.
One of the main
points of my April piece was to explore the factors that would work
against the continued dollar decline that proceeded through 2002
2004, and would, more generally, produce a more uncertain future path
for the dollar than was being widely asserted at the time. The first
and most straightforward factor that I had mentioned was that U.S. policymakers
themselves would not passively allow a dollar collapse. I said then
that the key policy tool for the U.S. to support the dollar against
the darkening opinion of global currency speculators was to raise interest
rates-i.e. sweetening the interest rate returns for global bond purchasers
if they keep holding their wealth in U.S. dollar bonds. Federal Reserve
Chairman Alan Greenspan has done just that in the ensuing months, having
pushed up the Fed's main monetary policy rate (the federal funds rate)
from 2.75 to 3.75 percent just since April, and with promises of more
increases to come.
I also said that
any movement among European policy makers away from the neoliberal policy
agenda that has prevailed for roughly two decades would spook currency
markets and push the euro down against the dollar. Neoliberalism in
Europe, including low government deficits and high interest rates, have
conspired to maintain unemployment in the range of 10 percent for a
most of the past 20 years in most European countries.
European elites
appear just as committed to neoliberalism today as they were in April.
But the European people have made it clear that they've had enough.
The most vehement expression of this sentiment came when voters in France
and the Netherlands both decisively rejected the European Union constitution
last May. Global currency speculators did not miss this unequivocal
message from the European voters, even while European politicians expressed
disgust over the people's irresponsibility. The EU's then President
Jean-Claude Junker of Luxembourg declared that "This evening, Europe
no longer inspires people to dream."
A third change in
the global currency landscape since April was something I did not discuss
in the earlier piece the decision last July by the Chinese to
allow their currency, the yuan, to adjust slightly upward relative to
the dollar. The Bush administration had been lobbying heavily for the
Chinese to make this move, given that a low-valued yuan helps the Chinese
to keep pushing cheap imports onto the shelves of Wal-Marts and the
rest of the U.S. market. This makes the U.S. trade deficit-our purchases
of imports in excess of our sales of exports-grow correspondingly. The
trade deficit, in turn, along with the federal government's $400 billion
budget deficit, are the primary forces pushing the dollar onto its downward
trajectory in the first place.
U.S. policymakers
have long complained that the Chinese haven't truly embraced the rules
of neoliberal global capitalism, giving themselves an unfair advantage
by holding down the value of the yuan. This is entirely true. For decades
now, the Chinese have been ignoring neoliberal precepts in this and
many other ways, through which disdain they have produced something
approximating to the fastest rate of sustained economic growth in world
history. One would think that this new Chinese gesture and to date
nobody,including probably the Chinese themselves, knows whether this
move amounts to more than a token nod in behalf of U.S. sensibilities
will immediately work to nudge the dollar back onto the downward
path that prevailed between 2002 and 2004, at least at first. This is
because with the dollar now being less valuable relative to the yuan,
it is correspondingly also less valuable for everyone else in the world
that has been using dollars to purchase imports from China. However,
if a more expensive yuan does contribute to a smaller U.S. trade deficit,
the net result from the smaller trade deficit could be to push the dollar
back up.
Still another possibility
is that, with the dollar cheapened relative to the yuan, the Chinese
may then decide to stop purchasing U.S. government bonds as heavily
as they have done the past few years. The purpose of U.S. bond purchases
by the Chinese (along with an even more voracious customer, the Japanese)
was to prevent the dollar from falling too rapidly, which would thereby
render Chinese products more expensive in the U.S. market. However if
the Chinese did decide to cut back on their U.S. bond purchases, this
would produce serious downward pressures on the dollar against the euro
and other currencies, not simply against the yuan. Alan Greenspan would
then likely push U.S. interest rates still higher in self-defense. The
U.S., in short, may not find themselves entirely enamored with the exchange
rate policy they wished for from China.
Such uncertainly
is the very stuff on which the global currency casino thrives. Is the
dollar going to keep rising, as it did between April and July, or return
to its downward trajectory of the previous two years? The dice keep
rolling. As Lord Keynes, again, famously remarked, "on such matters,
we simply do not know."
Still, whether or
not the dollar continues falling was not the main question I posed last
April. My main concern was rather, would a dollar decline be good or
bad news? Nothing has changed since April to undermine my basic point
then, which is, there is no simple answer to that question, not least
because the question inevitably itself pushes us well beyond the environs
of the financial market casino. We can't consider whether a dollar decline
is good or bad news without asking, "for whom?" Wall Street?
U.S. manufacturers? U.S. workers? French, Dutch or Chinese capitalists
or workers? How about South African workers? The answers don't break
down easily along well-defined political lines.
Thus, under neoliberalism,
U.S. workers have been badly hurt by the U.S. trade deficit and globalization
more generally, since it increasingly places them in competition for
jobs with workers elsewhere. U.S. workers therefore benefit from a weaker
dollar, since a weak dollar makes it easier to sell U.S. products in
foreign markets and harder for imports to compete with U.S.-based manufacturers.
But U.S. workers would benefit far more from an anti-neoliberal commitment
to full employment policies in the U.S., something akin to what the
French and Dutch voters appeared to be effectively endorsing in May.
A full employment program in the U.S., as well as France and the Netherlands,
would also benefit workers in other countries as well, including those
in poor countries. If governments in rich countries were committed to
creating jobs for their residents, then differences over trade policies
and exchange rates the struggle to 'beggar-thy-neighbor,' to create
more jobs at home by taking jobs away from neighboring countries
would diminish to a second-order problem.
But as long as exchange
rates and trade policy remain a first-order problem, the U.S. does face
a serious and unavoidable trap, which is the legitimate source of the
hand-wringing about the dollar's decline from 2002 to 2004. Even without
the help of the Japanese and Chinese purchasing U.S. government bonds
at their recent heavy rates, the U.S. can probably counteract the long-term
downward pressure on the dollar generated by our persistent trade and
budget deficits. But the Fed will have to keep raising U.S. interest
rates to accomplish this. Persistently rising interest rates will then
push the U.S. toward recession, especially given that the U.S. housing
market bubble is founded on this now cracking foundation of low interest
rates.
The threat of recession
therefore hangs heavily over the remainder of the Bush -2/Greenspan
era, with the fundamental problems extending well beyond simply the
ups and downs of the dollar. But this should be no surprise, given that
Bush/Greenspan, just as with Clinton/Greenspan, have never wavered in
behalf of a fundamentally neoliberal agenda. The real issue is therefore
the one that that French and Dutch voters pushed into the faces of Europe's
elites last May: how long will neoliberalism continue to call the shots,
defining the limits of acceptable economic policy?
The answer to that
question, ultimately, is about politics and not economics. Neoliberalism
will continue to make the material circumstances of life worse for the
overwhelming majority of people throughout the world. But the Alan Greenspans
of the world also know how to prevent full-blown economic meltdowns.
Opponents of neoliberalism therefore can't simply wait for Greenspan
and company (including his successor, to be named soon) to slip up and
allow a calamity to happen. The historical transition away from 25 years
of neoliberal ascendancy will only come when the "no" to neoliberalism
votes, such as in France and the Netherlands, can be transformed into
positive and successful programs and movements throughout the world.
Robert Pollin
is professor of economic and founding co-director of the Political Economy
Research Institute at the University of Massachuesetts-Amherst.