Thursday, December 16, 2004

I think I've finally figured out what "We support a strong dollar" actually means.

Yesterday the Boy King made a few more waves following a meeting at the White House with Italian Prime Minister Silvio Berlusconi.
President Bush pledged Wednesday to work with Congress to reduce the government's huge budget deficit as a key step in assuring the world that his administration supports a strong dollar.

"We'll do everything we can in the upcoming legislative session to send a signal to the markets that we'll deal with our deficit, which, hopefully, will cause people to want to buy dollars," Bush told reporters. . . .

"The policy of my government is a strong-dollar policy," Bush said during a brief news conference following the Oval Office meeting, echoing statements he and Treasury Secretary John Snow have made numerous times over the past three years as the dollar's value has fallen sharply against many major currencies. . . .

Bush told reporters that the trade deficit was "easy to resolve. People can buy more United States products if they're worried about the trade deficit."
Mmm, that's pure genuis. Of course, another "easy" way to resolve the deficit is for Americans to buy less foreign products. But nobody ever accused George W. of knowing anything about economics. Or much of anything else for that matter.

It has become comic to hear Bush repeat that he "supports a strong dollar" ad infinitum like some kind of Hare Krisha chant. It's downright bizarre when this unbelievable claim is followed -- as it always is -- by the Currency Market Creed ("I believe in the Market Almighty, which shall determine all relative currency values"). Yet I do think that Bush is making a cryptic sort of sense.

What Bush & Co. are really saying is "we will not engage in a competitive currency devaluation".

But does anybody buy it? Some like Stephen Li Jen at Morgan Stanley believe that the US commitment to doing absolutely nothing in the face of the falling dollar is a de facto devaluation strategy. Greenspan's little speech after the election makes one think that perhaps the Fed wouldn't mind a little competitive devaluation after all.

So we seem to have on the table two rather dangerous US policy choices for addressing the current account deficit: [1] competitive currency devaluations which will only piss off the Europeans more, drive Japan into outright recession and utterly fail to address the trade deficit with China; and/or [2] targeted tariffs/quotas. Both have rather disturbing track records. Liberals demand #1 (although they won't admit it's competitive devaluation), I'd like more of #2, and the Bush administration will simply do anything it takes to destroy Social Security and eliminate all taxation on capital. Somehow I suspect neither I nor the liberals are going to get their way.

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