September 07, 2012
The NYT bizarrely told readers that the value of the dollar is “almost entirely outside of American politicians’ control,” in an pseudo fact check of the Democratic convention speeches last night. This is clearly wrong.
First, the actions of the Federal Reserve Board could have an enormous impact on the value of the dollar. Raising and lowering interest affects the willingness of foreigners to hold dollar denominated assets. This means that whether intended or not, monetary policy will affect the value of the dollar. However the Fed could take steps with the explicit goal of raising or lowering the value of the dollar.
To be specific, it could lower interest rates in order to lower the value of the dollar. Furthermore, if it chose it could amplify the impact of a drop in interests on the value of the dollar by explicitly targeting a lower valued dollar.
For example, if Bernanke were to announce that the Fed would continue to buy long-term bonds until the dollar had fallen by some fixed amount (e.g. 20 percent) against a basket of currencies, then it is likely that many investors would sell their dollar assets in order to get out before the price declined. This would help bring about the targeted price decline.
The Fed could even carry this a step further. It could directly intervene in international currency markets, buying up hundreds of billions or trillions of dollars of foreign currency by selling dollars. This would also push down the value of the dollar.
While the Fed is independent of the executive branch and Congress, the president, with the approval of the Senate, does appoint 7 of the 12 voting members of the Fed’s Open Market Committee. A president (or a majority in Senate) could insist that every new person appointed to the Fed must be committed to lowering the value of the dollar. The president and Congress could also try to pressure current members to follow this course.
In addition, there are measures that the president could pursue even without the cooperation of the Fed. Many countries, most importantly China, explicitly prop up the dollar against their own currencies in order to maintain their export markets in the United States. The president could negotiate agreements with these countries to get them to end this practice, thereby lowering the value of the dollar.
This would presumably involve trade-offs, especially with the more powerful countries. However, it is likely that if the United States were prepared to make concessions in other areas, for example on pushing market access for Goldman Sachs and other financial firms, on enforcing Microsoft’s copyrights or Pfizer’s patents, our trading partners would agree to raise the value of their currency against the dollar. In this case, it would simply be a question of whether the president was willing to put the interest of manufacturing workers ahead of the interests of other powerful interest groups.
Finally, there are a range of penalties that the president could impose on countries that are deliberately holding up the value of the dollar against their currencies. These include impose tariffs, which WTO rules allow against countries that deliberately hold down the value of their currency. The United States could also impose confiscatory taxes on the earnings on dollars assets of foreign central banks as proposed by former Fed economist Joe Gagnon. This would provide a serious disincentive to foreign governments seeking to prop up the value of the dollar against their currency.
In short, there are a wide range of policies that our elected politicians can pursue to lower the value of the dollar. They have not pursued these policies by choice. There are powerful interest groups that benefit from an over-valued dollar (e.g. retailers like Wal-Mart that import much of what they sell or manufacturers like General Electric who have most of their operations overseas).
Politicians have opted to put the interests of the groups that benefit from an over-valued dollar ahead of the interests of the workers who would benefit from millions of new manufacturing jobs. The NYT should be highlighting this choice, not concealing it.