Some excerpts from the editorial:
Adam Smith Growls
November 9, 2007; Page A18
“The U.S. dollar is the linchpin of not only the American economy but also the world monetary system.” Those words were the lead of an editorial in this newspaper on August 21, 1978, amid the inflation of the 1970s and the world’s last great dollar crisis. Are we watching another such period today? It’s not inevitable, but this week we all got a reminder of what such a thing looks like, and it isn’t pretty.
Coming from opposite sides of the world, [Chinese and French reactions] are warnings worth heeding. For as our editorial explained 30 years ago, the dollar is far more than a medium of American exchange. It is a reserve currency, held by central banks the world over, and the core of the monetary system that underpins what has been a remarkable period of global economic growth. By toying recklessly with dollar devaluation, our policy makers are also toying with a far larger economic crisis than the current credit problems.
Yet the striking and dangerous fact is that the conventional wisdom in U.S. financial circles has been that the dollar’s fall is in fact beneficial. Wall Street wants easier money to rescue the banks caught in the subprime crisis, never mind the risks of future inflation and how damaging that can be to stocks. Manufacturers favor a lower dollar to boost their own exports, never mind how exchange-rate volatility makes a hash of business planning.
Worst of all are the economists, who should know better but have convinced themselves that the dollar must fall so that the “trade deficit” can adjust. Some want to give a short-term boost to exports, which they hope will keep the economy out of recession while housing dips. Others have been preaching trade-deficit doom for so long that they view a dollar rout as a kind of policy wish fulfillment…
It’s preposterous to think that millions of foreigners awoke in the last week and suddenly discovered that the U.S. trade deficit they’d tolerated for years is a crisis.
To understand the dollar’s current woes, you have to look elsewhere—to monetary policy and economic management. The supply of dollars in the world is ultimately controlled by a single source, the Federal Reserve. With its aggressive easing in September, and again in late October, the Fed has signaled to the world that it cares more about creating dollars in the hope of limiting U.S. credit problems than it does about the dollar’s value. Investors can see this, and so they are dumping dollars and looking for other assets to hold. This includes commodities such as gold, which is now at $835 an ounce…
The world can also hear the silence from U.S. economic officials, whom they have come to believe are content with the dollar’s decline. Treasury Secretary Hank Paulson mouths the ritual lines about a strong dollar, even as he keeps pressuring China to revalue the yuan. Fed Chairman Ben Bernanke yesterday told Congress that inflation remains a risk, which shows that he at least has noted this week’s dollar rout. But his previous actions have left him and the Fed with a growing credibility problem that is perilous for any central banker.
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Our current financial woes are in large part the result of previous monetary excess, which fueled a debt and asset boom that has become a banking bust. The way to emerge from the mess is to slowly but honestly work off the bad debt and write down the losses. The one sure way to make things worse is with more monetary excess. That could trigger a run on the dollar and the necessity for far higher interest rates to stem it.
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