Insight Magazine - 'Strong Dollar' Hides Weak Policy

Treasury Secretary John Snow.

By Kelly Patricia O Meara

Royalty bows and curtsies, nations tremble and financial institutions begin to stammer when threatened by three words: "strong-dollar policy." For a phrase that has risen from the swamps of the dismal science only within the last decade, it nonetheless has taken on a kind of Godzilla status in the global economic community. And while the worlds of pundits, technocrats and economic seers have held their breath awaiting official support for such a "policy" by each successive administration, there are many who believe the phrase is nothing more than the federal equivalent of "Gesundheit!"

Having failed to turn up an official definition of "strong-dollar policy," and on the barest chance that the policy spells out steps to keep the dollar strong, Insight sought out the great and near great to clarify what the phrase might mean. Alas, it immediately became clear that the economists, politicians and managers most likely to be responsible for any such "policy," if there is one, make it a black-letter policy never to discuss, well, the "policy."

Take for example Robert Rubin, who was Treasury secretary under President Bill Clinton. Now a board member of Citigroup and a bazillionaire, Rubin is credited widely with being the key architect of the strong-dollar policy. Keenly aware of the dollar's recent slide against other world currencies, Rubin apparently could not be bothered with this slight question and did not return Insight's calls to inquire how this "policy" for which he is famous might actually work.

Lawrence Summers, now president of Harvard University, followed in Godzilla's footsteps by taking over as Treasury secretary upon Rubin's departure. Summers did not depart from the strong-dollar policy, and Federal Reserve Chairman Alan Greenspan raved about Rubin's replacement. Greenspan made it clear that the strong-dollar policy was here to stay, and said Summers "is a person of extraordinary talent and judgment who will continue the important work Bob Rubin initiated." But when Insight requested an interview to discuss the "policy," even to request a definition of what it might be, Summers too was unavailable.

Given that the top bananas of the strong-dollar policy were unwilling even to discuss this weighty verity, Insight's reporter reasoned that even a standard-reference definition of "policy" might be helpful. According to the American Heritage Dictionary, the word "policy" came out of Latin through the tortuous trials of the Middle English and Middle French to mean "a plan or course of action, as of a government, political party or business, designed to influence and determine decisions, actions and other matters."

Seems simple enough, but what about the rest? While everyone gives lip service to supporting the strong-dollar policy, and the world is acutely aware of that support because it routinely is touted as the core of U.S. financial practice, no one who knows would say what it is. So Insight rephrased the question, asking: What is the official course of action, the plan or design, to make the dollar strong? Put that way, current Treasury Secretary John Snow responds: "There has been a consistent policy on the dollar going back the better part of a decade, which I support. I favor a strong dollar. A strong dollar is in the national interest. A strong currency provides a reliable medium of exchange and serves as a stable store of value that people choose to hold. Sound pro-growth economic policies and a commitment to free and open markets are the foundation for a strong dollar."

Uh-huh, but what is the "policy" that ensures all or any of this? Is it possible that any administration might not be committed to free and open markets in the interest of stability? Is a closed and manipulated market a policy option?

While Insight is not into economic gnosticism, and does not claim to specialize in the arcane secret knowledge of monetarism, Secretary Snow's "policy" still seemed a little oblique. Asked to clarify the secretary's explanation of the strong-dollar policy, a spokesman for Snow tells this reporter: "The secretary has said that a strong domestic economy, an inviting investment climate and competitive markets are the best way to achieve a strong dollar." Huh? That's the "policy"?

Well, it isn't sexy, but it's an answer. The problem is that it appears to have a strong similarity to the explanation that "Wet streets cause rain."

Determined to find someone in officialdom who actually might explain the mechanics of the strong-dollar policy, Insight determined to pore through statements on these matters by the top money manager of all time, a man so open in his deportment and so filled with libertarian principles that for years he lectured on economics to the devout followers of the late Ayn Rand. Whole nations are at risk of collapse when the master of the Federal Reserve Board speaks, so every word he utters is examined with the greatest of care. But when it comes to the strong-dollar policy, Fed Reserve Board Chairman Greenspan has been quiet as a church mouse. This apparently is so, according to a spokesperson, because "the Federal Reserve does not comment on the strong-dollar policy. We defer to the Treasury Department on that."

Been there, done that and bought the T-shirt.

Which raises several questions. For instance, is it possible that the strong-dollar policy is not economics at all but polemics, that it is in fact an upbeat phrase in search of a policy? If not that, then what? Could there be something nefarious about the "policy" that the establishment economists and money managers are determined to keep close to their vests? Given that the men who created the "policy," and those who support it, cannot or will not explain what it is, one hardly can be surprised at charges that this emperor of economic shibboleths may be naked as a jaybird.

Steve H. Hanke, a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute, tells Insight that the alleged policy is so much yah-yah. "Officially," Hanke explains, "everyone will run for cover. No one is going to be able to tell you what the strong-dollar policy is because it is a rhetorical phrase coming out of Washington that is meaningless. Analytically it doesn't mean anything at all."

According to Hanke, "The strong-dollar policy became the mantra of Treasury secretaries Rubin and Summers, and the reason the press kept repeating it is that during their tenure at Treasury the dollar was 'strong' relative to other currencies. But we weren't doing anything in the form of a policy, and Rubin and Summers knew it was an empty phrase. The press heard Rubin say, 'Oh, yes, we have a strong-dollar policy,' and then the dollar gets stronger relative to other currencies, so they think there is some policy - that there's something in the shadows going on that is consistent with this. No one ever thought about asking what it was. The fact is that there's nothing in those shadows, and no one was - or is - doing anything."

But Bill Murphy, chairman of the Gold Anti-Trust Action Committee, a nonprofit organization that researches and studies the gold markets and reports its findings at www.LeMetropoleCafe.com, claims to have taken a good look into the shadows. He tells Insight that "asking this question is important because the strong-dollar policy isn't just an empty phrase. It started with a paper written by former Treasury secretary Lawrence Summers entitled Gibson's Paradox and the Gold Standard, which stated 'gold prices in a free market should move inversely to real interest rates.'" In other words, Murphy explains, "what has been happening is that a policy to hold down the dollar price of gold was instituted to keep the dollar strong. The idea was to hide inflation, keep interest rates low and attract money to U.S. markets. This kept the average investor from getting any hint that something was wrong with the dollar itself. The strong-dollar policy amounts to little more than secretly using U.S. bullion and claims on it to manipulate the gold market. By keeping the gold price down, keeping it low, they made even gold uncompetitive to the dollar, reassuring the world that all was well."

Murphy asks: "If this administration supports the so-called strong-dollar policy - the same alleged policy as Rubin and Summers - why is the dollar tanking? That is, how has the 'policy' changed? I've been asking this for two years and no one has been able even to tell me the mechanics of the original strong-dollar policy. If they can't tell you what it is then how can they possibly tell you how it has changed?"

According to Murphy, "It's going to be quite a story when this thing finally blows. Just look at the Enron mess. No one knew what was going on there and how bad it was until it blew up, and only then did everyone find out what a fraud it was. The same will be true of the strong-dollar policy. It's just a lot of nonsense."

Whether the strong-dollar policy is "nonsense" is yet to be seen. What is clear, however, is that no one in officialdom seems willing and able to provide a cohesive explanation of what the "policy" consists of, or how it is implemented, leaving the economists and pundits to speculate and surmise. In the meantime, the "strong" dollar has become "soft," down almost 26 percent against the euro and 21 percent against the Swiss franc.

Currently, the United States has the highest trade deficit in its history, totaling a whopping $503 billion. This means the country has bought and imported $503 billion more in goods than it has exported, flooding foreign capital markets with dollars to invest in the United States or buy more U.S. goods, the prices of which such massive purchases naturally would bid upward. Perhaps even more important is that the U.S. economy is dependent on an estimated $1.5 billion to $2 billion a day of foreign investment to stay afloat. The dollar is losing more of its "strength" every day, and a decline in foreign investments already has begun.

Having just the tiniest clue about the "policy" that made the dollar strong might be helpful should it continue its downward slide. Then again, maybe the strong-dollar policy has been nonsense all along and what we have here is a case of no one bothering to demand an explanation from those who support it. Whatever it is.

In his most recent attempt to define or "redefine" his terms, Treasury Secretary Snow has embarrassed himself internationally by insisting there is a strong-dollar policy, but denying its strength could be measured against other currencies, saying "strong" is only a matter of public confidence and assurance that counterfeiting is under control. The secretary's remarks immediately were read as a "change" in policy, which was interesting in that he still had not defined U.S. dollar "policy." Worse, that "strong means confidence" explanation still was floating in the air when a Treasury spokesman jumped in to declare that "there has been no change in policy."

Considering that no one in the free world had been found to explain the "old" strong-dollar policy, maybe it's a good thing that no "new" policy was implemented. In the meantime, however, word that the emperor was buck naked and could not credibly define his policy had spooked the currency exchanges, causing confidence to plummet and the dollar to drop further against most of the other major currencies. Res ipsa loquitur.

Kelly Patricia O'Meara is an investigative reporter for Insight.