If you read the financial press or listen to what politicians say, you have probably heard many times how important it is for the Chinese renminbi (yuan) to strengthen against the dollar. Indeed, it sometimes sounds as though a weaker dollar is the key to a prosperous economic future for Americans. Nonsense!
Let’s look at this issue from an individual standpoint. Are you better off with a stronger or weaker dollar? In other words, do you hope to be able to buy a lot or a little with a dollar? Silly question, isn’t it?
I first learned the advantage of a strong dollar when I lived in Colombia, South America, as a 19-year-old. When I first got there, I could exchange one U.S. dollar for 16 Colombian pesos. Several months later, I could get close to 20 pesos per dollar. At that exchange rate, I could buy a steak dinner and a beer in a nice restaurant on Carrera Séptima, the main street of the capital city, Bogotá, for the equivalent of one dollar. For an impecunious college kid, that was a real treat!
A strong currency is a consumer’s best friend. Why, then, do politicians fixate on exchange rates and lobby for a weaker dollar?
There are two reasons for this anti-consumer attitude: an obsession with balance of trade data and the problem of debt. Let’s examine the trade question first.
We hear the constant refrain that we have such a large trade deficit with China because China manipulates the dollar-yuan exchange rate, keeping the yuan artificially cheap. True, the Chinese do manipulate the exchange rate. But if the yuan were to strengthen significantly over the next several years—say, even if it doubled vis-à-vis the dollar (although there is no guarantee that it would in a free, un-manipulated exchange-rate market)—would China’s trade surplus with the United States shrink? Probably not.
Nearly 40 years ago, the exchange rate for the Japanese yen was over 300 to a single dollar. Japan was running a large trade surplus with the United States. Some experts believed that the way to shrink the Japanese surplus (i.e., the U.S. trade deficit) was for the yen to appreciate.
Fast forward to the 1990s. The exchange rate was about 90 yen to the dollar. In other words, the yen bought more than three times as many dollars as before. And guess what? The U.S. trade deficit with Japan hardly budged.
In fact, Japan derived some considerable benefits from the stronger yen. For example, since the global market for oil is priced in dollars, the real cost of higher oil prices to the Japanese has been only about 1/3 of ours. Advantage, Japan.
Just as other factors outweighed the impact of the currency exchange rate in the trade balance between Japan and the United States, this has also been the case in recent years with China. Between July 2005 and July 2008, the yuan strengthened 21 percent against the dollar, and yet the annual trade deficit rose from $202 billion to $268 billion.
American imports from China increased by 39 percent during that period in spite of the stronger yuan. In theory, a stronger yuan is supposed to reduce American demand for Chinese goods by pushing their prices higher. In practice, though, most Chinese goods are labor-intensive, meaning that labor is the major component in their price—yet even if your Chinese wage rates rose by several multiples, the goods they produce would still be competitively priced here.
This isn’t to say that no Americans benefit from a weaker dollar. The weak buck increases the sales of some exporters. I’m sure they are delighted to contribute to the reelection campaigns of politicians who are weak-dollar proponents, even though most Americans are net losers due to reduced purchasing power.
Besides exporters, the other special interest group that benefits from a weaker dollar is official Washington itself. Throughout history, debtors have favored monetary debasement and depreciation. It is easier to repay debts that way. Since Uncle Sam is the largest debtor in the history of the world, Washington insiders have the strongest incentive to weaken the dollar.
Even though a weaker dollar defrauds our creditors, foreign creditors prefer getting repaid in cheaper dollars to an outright default and suspension of payments, so they will hold their noses and settle for what they get. Through this ethically dubious device, our profligate, dissolute, bankrupt government bleeds the wealth of productive citizens and manages to prolong its misrule for a while longer. We the people are left to hold our noses—just like the Chinese and our other creditors.
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