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Another Alleged “Strong Dollar Policy” Sighting

Another Alleged “Strong Dollar Policy” Sighting

Today the falling dollar gained some reprieve from Treasury Secretary John Snow’s familiar endorsement of a strong dollar, dubbed by the media and Wall Street during Robert Rubin’s tenure as the “strong dollar policy.” As I have written in the past, the “strong dollar policy” is as real as Big Foot or the Loch Ness Monster, with any reported sightings merely figments of the observers own creative imaginations.

As I wrote repeatedly during the Clinton Administration, there is no such thing as a strong dollar policy. (In fact, given its recent fall, some are speculating that the U.S. actually has a stealth “weak dollar policy.”) The truth is that when it comes to the dollar, there is no policy at all, other than to talk it up and hope for the best. However, just because the dollar is falling doesn’t mean the administration wants it to. The reality is the dollar is weak, it’s going to get much weaker, and there isn’t anything the administration can do about it.

The situation is reminiscent of a college student who parties all night instead of studying. It’s not that he wants to flunk, he would of course prefer the honor roll. However, failure is the natural consequence of his actions. Similarly, the administration would prefer a strong dollar, but a weak dollar is the unfortunate result of an American economy characterized by declining production, inadequate savings, reckless consumption, soaring household debt, ballooning federal budget deficits, and an overly-accommodative Fed.

The dollar did not rise during in the 1990’s because of the existence of a policy. It rose for the same reasons many dotcoms rose; greedy buyers foolishly bidding prices higher despite lousy fundamentals. Then Treasury Secretary Robert Rubin’s repeated endorsement of the dollar’s rise, the essence of the “strong dollar policy,” is analogous to a dotcom CFO having stated that a strong stock price was in its shareholder’s interests. However, would investors buy shares solely based on such a “strong stock policy,” while ignoring plunging sales, exploding liabilities, collapsing market share, bloated payrolls, and repeated new share issuance at declining prices? Why should it be any different with the dollar?

Those of you still holding dollars had better do some serious reflection, and ignore all the talk about a mythical “strong dollar policy” The alternative is to go down with a sinking ship, as the captain stands saluting atop its bridge, waist deep in water, assuring all aboard that “a strong ship is in its passenger’s interest.”

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