Central bank biases: Strong dollar

The article reflects the personal opinion of the author and does not reflect the views of Action for Economic Reforms. The writer is an entrepreneur, and author of books “The Peso Exchange Rate: Why Are We So Poor?” and “The Philippine Economy: Do Our Leaders Have A Clue?”

The two books I wrote in 2006 and 2007 explain that, for an economy to be strong, its currency must be “weak.”

This belief runs parallel to the policy of South Korea and China which aim to grow their economies with strong exports.

This belief runs counter to the policy of the US Central Bank which wants the US dollar strong.

To them a strong US dollar means a stronger US economy.

US dollar on downward trend

What is the trend on the value of the US dollar now? The US dollar continues to lose value on a downward fluctuation.

Here is a comparison of the exchange rates on Sept. 30 with Oct. 28 based on the Oanda Interbank Rates.

Note: Philippine Peso 47.70 to 47.38, Indian Rupee 48.34 to 47.14, Malaysian Ringgit 3.49 to 3.40, Singapore Dollar 1.42 to 1.40, Korean Won 1,190 to 1,188 and Thai Baht 33.71 to 33.49.

Other currencies: Australian Dollar 1.15 to $1.09, Brazil Real 1.79 to 1.74, British Pound .63 to .61, Canadian Dollar 1.09 to $1.07, Euro .69 to .67.

Weaker dollar, stronger exports

A depreciating US dollar makes US exports more competitive in the world market. A lower value for the US dollar makes US goods and services more affordable to countries whose currencies are appreciating.

With this trend, we now read headlines such as: US Trade Deficit Narrowed in August (New York Times, Oct. 9), Weak Dollar Improves US Trade Gap (Financial Times, Oct. 9), In Dollar’s Fall, Upside for US Exports (NYT, Oct. 18).

A depreciating dollar increases exports and results in more production for US industries.

Exports, engine of growth

This in turn leads to greater employment, higher income and increasing purchasing power for Americans. In this cycle of growth, the US government enjoys the benefits of increased taxes.

Furthermore, exports as the engine of growth for the US economy will lead to trade and current account surplus.

Bottom line: Competitive exports will enable the USA to earn money from world trade and gradually pay off its debts with the rest of the world.

It is exports that enable Asian countries to ward off the impact of world recession. Exports are the reason for the increasing frequency of headlines such as: Asia said to be leading the globe out of crisis (NYT, October 19), South Korea economy grows at fastest pace in seven years (Wall Street Journal, October 27), Current-Account surplus jumps in South Korea (WSJ, October 29).

Should be happy but not happy

I should now be happy for Americans with their depreciating dollar and increasing exports. But I am not.

First, investment bankers and derivatives players are making money on currency fluctuations. The greater the risk they create, the greater the profit they make. They thrive on exchange rate gyrations!

What we see now to be a decreasing value of the US dollar may turn the opposite in a month or so.

Second, a lower value for the US dollar means a higher value for other currencies.

An increased value for the UK Pound versus the US dollar means the UK will continue to be uncompetitive, in debt and under recession. It is the same with Euro countries such as Spain.

Even with the US dollar depreciating, US policy makers remain unhappy with China with its “undervalued currency”.

The food for the goose is poison to the gander.

Third, under the environment of FX instability, businesses and economies cannot plan effectively to prevent economic downturn.

One currency

Consider, for example, the impact of fluctuating exchange rates on the price of oil.

What am I proposing?

The Group of 20 which controls more than 80% of world trade should initiate the creation of a new world currency and gradually abolish their local currencies, including the US dollar.

It can effect this change by the same approach by which Germany, Italy, France, Austria, Belgium, Finland and about 10 other European countries abolished their individual currencies and formulated the Euro.

At first, the Euro was just a dream. Then it turned into an aspiration, a goal, a meeting of the minds. And on January 1, 2002, the Euro became a reality as the currency for more than 600 million people.

Here are the advantages of one currency for the world: no more “beggar-thy-neighbor” strategy, no more haranguing of China on its “undervalued currency”, no more foreign exchange risks and instability, no more charges related to exchanging currencies! In addition, we have the advantage of turning our focus on other economic issues and of faster trade among nations.

Of course, there are disadvantages, but these are more of constraints in how to get things done better than of errors inherent in the idea of one universal currency.

Central bank biases

And yet, I know that many traditional central banks will oppose this idea. Why?

First, traditional central banks appreciate the interests of financial markets more than the real economy.

The institution of one currency will benefit the real economy but will diminish the profitability of financial market operators.

Example: Imagine the loss of commissions of financial institutions arising from the savings of the real economy as a result of the abolition of exchanging currencies!

Second, traditional central banks appreciate the value of financial assets in books more than the long-term interests of the real economy – employment, production, people and long-term growth.

Example? A depreciating US dollar is good for US competitiveness, exports, domestic production and employment, but it will devalue the financial assets of investment bankers in their books and reduce profitability of investment bankers from their short-term money-making ventures.

A strong dollar, on the other hand, makes strong financial statements but uncompetitive performance in the long term.

Third, the US government thinks it will lose its control over the US economy if it gives up the US dollar.

But Germany, France and Finland did not lose their control over their economies when they switched to the Euro from their Marks, Francs and Markka.

By giving up the dollar and adapting one world currency, the USA will gain competitiveness, even up the playing field in international trade and promote the expertise, innovativeness and creativity of its people in the world economy.

As it is now, the USA is turning more dependent on cheap imports and cannot produce innovative products affordable to the rest of the world because of its “strong” dollar.

Grow small or grow big

Central banks have two options. They can continue to focus on the interests of financial markets or widen their horizons and shift their priority to the real economy.

They can pursue the interests of the financial markets at the expense of the real economy or move the real economy and derive financial benefits when the real economy has recovered and grown.

So long as central banks focus their sights on narrow interests and think small, the world economy will remain small.

But if they aim for the wider and longer view, the world economy will grow and jump to the next level.

The wider and longer view starts with the institution of one global exchange rate.

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