"Did a Stronger Dollar Really Mean We were in Good Shape?" (CITS DEBT WA

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                    W. Curtiss Priest, Ph.D.
          Center for Information, Technology & Society
              466 Pleasant Street Melrose, MA  02176
  E-mail: BMSLIB@MIT.EDU, Voice: 781-662-4044, FAX: 781-662-6882


                           May 23, 2003

                        Public Issue #:102

                          CITS DEBT WATCH

        "Did a Stronger Dollar Really Mean We were in Good Shape?"

             Commentary by Dr. W. Curtiss Priest, Director:

In December of 1996 I became convinced that the "strong"
American Dollar was weakening the economy.

So this letter to the editor appeared in the Boston Globe
(Dec. 23, 1996, p. A16)

  Does a Stronger Dollar Really Mean We are in Good Shape?

  The hocus-pocus of bereft popular macro-economic theory
  continues unabated in the Dec. 11th article, "US trade
  deficit hit record $48b."

  Does a "strong" dollar really mean a strong economy? -- perhaps
  we should be asking 'do strong winds mean trees will remain standing?'

  What creates demand for the dollar is mainly the interest rates
  we pay on the dollar. Our higher interest rates usually means the
  price of the dollar goes up relative to other currencies. Our
  interest rates go up when money is in demand for productive investment
  (a true sign of a strong economy) or it goes up when the federal
  government (the national debt), corporations (debt leveraged buyouts),
  and consumers (mounting credit card debt -- see also your coverage,
  p. D10 of Kennedy's criticism of bank credit-card rates) create
  demand for money, driving up interest rates. This non-productive
  source of demand may be the reason for the "strong" dollar and is not
  a sign of a strong economy.

Were those of us who foresaw this problem heard?  Probably
not, given that the boom only got more maniac over the next
four years!

As the song "Vincent" once said, "perhaps they'll listen now."

Please see the recent Christian Science Monitor article
below, "The dollar falls, and Treasury stands aside."

Dr. W. Curtiss Priest
Member, American Economics Association
466 Pleasant Street
Melrose, MA 02176

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The dollar falls, and Treasury stands aside

Currency is down 22 percent since January of 2002. White House insists
there has been 'no change' in policy

Dateline: NEW YORK

In a significant shift, the United States is backing away from verbal
support of the dollar - a move that will affect everything from the
European economy to home mortgage rates in Kansas.

For the past eight years, Washington has considered it important that
the US dollar remain strong compared with other currencies. Now it is
apparently less willing to define the greenback in terms of yen,
euros, or pounds sterling and instead is using less tangible
measurements.The result: The dollar, which has already fallen 8
percent in two months, is likely to drop even more. The move may help
the US economy by boosting exports, allowing American companies to
book more orders for everything from aircraft to bulldozers.

Yet it will likely hurt the already fragile European economy. It will
make it more difficult for overseas firms to sell goods here and
further curtail US tourism abroad.

At the same time, the move could rattle the US financial system. With
a trade deficit of about $42 billion per month, the US has to attract
foreign capital to finance the yawing gap. Much of the foreign money
that comes in gets invested in US stocks and bonds.

"This is a dangerous policy because the US is addicted to capital,"
says Robert Brusca, an economist with Native American Securities. "And
people don't like to invest their money here and find out they have an
instant loss."

The subtle change came out of a meeting of the Group of Eight finance
ministers over the weekend in Deauville, France, where Treasury
Secretary John Snow signaled the US would no longer defend verbally
the greenback as it falls in value. Instead, he said the dollar should
be viewed in terms of the more generic "public confidence" and
resistance to counterfeiting.

The move is apparently intended to help shore up the US economy. But
as the stock market fell early Monday and criticism mounted at home
and abroad, the White House moved quickly to try to calm fears.
Spokesman Ari Fleischer said there has been "no change" in the US
position in favor of a strong dollar. But he declined to define a
strong dollar.

Since January of last year, the dollar has been anything but strong.
On a trade-weighted basis, it's down about 22 percent - a significant
decline over a short term.

This is a reversal from the 1990s when the dollar rose steadily.
Treasury Secretary Robert Rubin voiced support for the rising dollar.
The strong greenback made it cheaper for Americans to travel abroad
and to import all kinds of goods. Foreigners flooded the rising stock
market with money, pushing the dollar still higher.

Yet now the US economy is struggling. Exporters are trying to find new
markets. Interest rates are very low, making yields lower for foreign
investors. And the declining dollar means that it now costs more to
import goods and services.

"What a weaker dollar means is we must give up more goods and services
to get the same from the rest of the world. It makes us less
well-off," says Paul Kasriel an economist at the Northern Trust
Company in Chicago. "Our standard of living will go down."

BUT the news of an apparent shift in American dollar policy was
welcomed by John Williamson, an economist at the Institute for
International Economics in Washington. A "more realistic value for the
dollar," says, would be good for the United States economy, boosting
exports and discouraging imports.

Moreover, any comparative rise in the euro should encourage the
European Central Bank to reduce interest rates in the 12-nation euro
area, Mr. Williamson says. The stronger euro reduces any inflation
pressures in Europe. And an interest rate cut is needed to bolster
European economies that may be slipping into recession.

The powerful German economy has lately shown signs of considerable
weakness. Williamson hopes that a weaker dollar may also prompt Japan
to carry out major banking reforms and ease monetary policy further.

A lot will depend on how fast the dollar dives. "A collapse of the
dollar would be a disaster," says Clyde Prestowitz, head of the
Economic Strategy Institute in Washington. Much better would be a
"slow and gradual slide" into a "more realistic equilibrium" with
currencies of other countries. If history is any guide, the dollar
will "overshoot in its fall," says Williamson. "I don't have any great
faith in our ability to control it."

Indeed, Mr. Kasriel notes that Treasury secretaries, such as Mr. Snow
or Mr. Rubin, have a limited impact on the greenback. "All the
secretary can do is jawbone," he says.

Instead, the dollar is more apt to move in relation to changes in
interest rates and in the economy. For example, Federal Reserve
Chairman Alan Greenspan's warning about deflation helped to drive the
dollar lower as foreign investors anticipated another interest rate
cut. "The dollar has had a big decline since the economic data has
been weaker," says Kasriel.

Mr. Prestowitz suspects that one element in the dollar's decline has
been the jump in the budget deficit in the US. Foreign investors see
this as pointing to an even greater need for the US to import capital.
Already, he says, the US "has been living beyond its means."

~~~~~~~~

By Ron Scherer and David R. Francis, Staff writers of The Christian
Science Monitor

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