Ending Our Dollar Defeatism

Economist David Malpass of Bear Stearns says in today's Wall Street Journal that President Bush needs to quickly declare an end to our weak-dollar policy:

Oil would cost less if the dollar were stronger, slowing the transfers to our antagonists in Venezuela, Iran and Russia.... Though many economists still support the theory of unlimited free-floating exchange rates, no weak-currency country has had a healthy economy.... Markets have labeled the U.S. a weak-currency country. That's an albatross that the president should dump. An administration decision to support a stronger dollar would be dramatic, and probably so unexpected that it would break the dollar's downward momentum, and with it the defeatism now dragging us down. If the dollar started up, the vicious cycle—dollar weakness causing economic weakness and more dollar weakness—could be reversed.... The many speculators now short-selling the dollar, or betting against the U.S. in favor of commodities and other currencies, would have to reduce their positions.... Treasury would begin working to achieve a stronger dollar, opening the possibility, anathema to dollar shorts, of a G-7 preference for a stronger dollar or even coordinated currency intervention.... In the economic confusion created by the weak-dollar policy, presidential campaigners are blaming NAFTA and free trade, not the weak-and-weaker dollar, for hard times. The president should state a preference for a stronger and stable dollar. It has a good chance of stopping the credit crunch. It's free and easy. And let's face it: Other measures aren't working.

My take: The "adverse feedback loops" created by the plunging dollar, surging price of oil, housing downturn, and credit crunch seemed to have intertwined into an economic Gordian knot, not to mention having produced an air of palpable financial panic like I have not seen in my adult life. It might just be time for Bush to play Alexander and slash the knot with a revitalized strong-dollar policy.

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