Columns
10:35 am
Tue October 14, 2003

Dennis Henderson - Recovery and the Value of the Dollar

Is a weaker dollar truly beneficial to U.S. economic recovery?

Wilmington NC – Click the LISTEN button above to hear Dennis' commentary.

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The US economic recovery has yet to gain traction. Current indicators suggest that sustainable growth is still more of a forecast that a fact. Amid a mixture of both encouraging and pessimistic developments, political unrest regarding the economy continues to rise. This has prompted actions by the Bush Administration to abruptly weaken the value of the dollar ? the results of which may be contrary to our overall economic interests.

Lets look at some recent trends. The September employment report contained a pleasant surprise, with an increase of about 57 thousand jobs. The employment gain reflected growth in consumer spending during the summer, which shored-up retail sales. Spendable income was helped along by the Bush tax cuts which resulted in tax-credit checks for many, and lower withholding rates for most everyone. Spending was also boosted by cash from mortgage refinancing, and near rock-bottom short term interest rates. The gain in jobs, however, was entirely in the services sector. Manufacturing employment continued its record 37 month-long decline, losing another 29 thousand jobs.

Despite September?s small gain, unemployment continues to hang over the economy. Nearly 3 million jobs have been lost since that last recession began in March 2001, and about 2 million currently unemployed job-seekers have been out of work for more than half a year. Much of the recent increase in goods sold has been supplied by imports, and most of the rest has come out of inventory. Thus, the increase in sales did not translate into new manufacturing activity.

At this point it seems unlikely that there is enough potential job growth to fulfill the promise of the President?s Council of Economic Advisors that the tax cuts will create more than 500 thousand new jobs by the end of the year. Indeed, some claim that the economy is now in a ?jobless recovery.?

In popular vernacular the jobless recovery is being linked to our trade deficit. As consumer spending expands, imports increase. Thus, little of the additional spending reaches American industry. Politically, it now plays well to bash foreigners ? particularly the Chinese ? for rigging their currencies at low values relative to the dollar, thus making their goods inexpensive for Americans. Congress is considering legislation that would put hefty tariffs on Chinese imports.

The Bush Administration has followed pattern. At the recent G7 meeting of the richest countries, the Americans sent a clear message: the Administration wants a weaker dollar. Or, the value of other currencies to increase. This makes imports more expensive, driving consumer spending toward domestic industry. International currency markets got the message. Since the meeting, the dollar has fallen to a 3-year low against the Japanese yen and has dropped significantly against most other currencies.

The Chinese, however, are not playing ball. Given the importance of the US market to the Chinese economy ? one of the world?s strongest today, they are not willing to un-peg their currency from the dollar. This causes the impact of the weak-dollar policy to fall primarily on the Japanese yen and currencies of our other trade partners.

The problem is, Japan?s economy is just beginning to show some life, following a deep and prolonged recession. A strong yen curtail?s their recovery ? and weakens demand for US exports. Similar logic applies to others, such as Canada and the European Union. Foreign central banks have attempted to mitigate their strengthening currencies by purchasing dollars. But, this cannot continue unabated. Foreigners already hold 36 percent of all US treasury bonds. Eventually a sell-off will occur, causing the dollar to descend sharply. This will drive up US interest rates ? exactly the opposite of what is needed to give legs to our own recovery.

In short, the Administration seems to be tempting fate with its weak dollar policy ? a policy with short term domestic political appeal but longer term economic consequences that could damage our own fragile economic up-turn.


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An archive of transcripts of Dennis Henderson's commentaries can be found at;

whqr.org/Dennis%20Henderson/archive03.htm