Posted by Joseph Y. Calhoun, III

Bob McTeer had a post today titled Dollar Confusion in which he endorses the idea that a weak dollar can help with the economic recovery. Here’s his conclusion:

So, my conclusion is there is a strong argument to be made for a strong currency. It just doesn’t apply in the midst of a deep recession when the main problem is inadequate aggregate demand. Many people who don’t acknowledge that are, in my opinion, trying to avoid sounding “Keynesian.”

I’ve said this many times before. My position on a strong dollar is similar to St.Augustine’s position on chastity in his famous prayer: “Lord, make me chaste, but not just yet.” My prayer is, “Lord give us a strong dollar, but not just yet.”

And here is my response left in the comments section:

Mr. McTeer,

Twice in my adult life the US has pursued a blatant weak dollar policy. The first was after 1985 when, through the Plaza Accord, we deliberately weakened the dollar in an attempt to cure our persistent trade deficit with Japan. As I’m sure you are aware, it didn’t work although we did manage to cause a stock market crash (at least according to some). The trade deficit did narrow during the ‘90 recession but that had little to do with the value of the dollar.

The second attempt to devalue our way to prosperity was during the recent Bush administration when a series of Treasury Secretaries managed to convey the message that a weaker dollar was okay with them and the US Chamber of Commerce. As you know, that didn’t do much for our trade deficit either, this time with China, although we did manage once again to crash the stock market. Deja vu all over again as Yogi once said. Yeah, I know, correlation, causation and so forth, but I’m 48 years old and every time we’ve let the dollar fall in a major way, it has meant an economic mess. From my viewpoint, that isn’t coincidental.

Now, I am not one of those who believes that a strong dollar ipso facto means a strong economy. It is good policy that produces a strong economy and therefore a strong currency. Actually what we should all want is not a strong dollar or a weak dollar but a stable dollar. The problem with a fluctuating dollar is that it plays havoc with economic calculation, especially in a globalized economy. But I digress…

So, my question is this: if good policy produces a stronger dollar and bad policy produces a weaker dollar, shouldn’t we be aiming for the former rather than the latter? How exactly can bad policy pursued for a limited time produce a positive economic result?

Devaluing the dollar is not the answer to our problems.