A Growing Weak Dollar Constituency…As Long As There’s No Collapse
By Marshall Auerback
From the early 1970's onward, American industrialists have been concerned about competitive inroads from lower wage countries on a rapid path toward modernization. In the 1980's the focus was on Japan and its successful takeover of a long succession of consumer durable goods markets (autos, TV's, etc.) and some high tech markets (semiconductors) that were developed initially by US firms. By the 1990's concerns were rife that imports of an ever widening range of goods from lower wage countries, particularly in the Far East, would "hollow out" America's industrial base.
Throughout most of the post-war period, a number of Treasury Secretaries conducted economic policy with an eye toward preventing a loss of US competitiveness. Faced with calls for protectionism from firms and workers whose industries and jobs were at risk, these former Treasury regimes were biased toward a low dollar exchange rate which would enhance the position of US industries in world trade without running the risk of trade wars posed by protectionist solutions. Most of these Treasury Secretaries remembered an earlier era when the US ran current account surpluses and was the world's largest creditor nation. They also had the experiences of the so-called Third World debt crisis of the 1980s in mind and the corresponding fear of debt trap dynamics. In other words, dollar devaluation was grounded in sound economic theory, rather than desperation. It was pro-active, rather than reactive.
Under Treasury Secretary Rubin, all of this changed. Secretary Rubin differed in his focus: trade competitiveness was seldom cited as an issue; instead, he emphasized the support a strong dollar gives to domestic financial markets. We see this clearly in an interview Mr. Rubin granted to the New York Times, September 29th, 1996.
Mexico was still boiling when Rubin faced his second potential political disaster, the fall of the dollar to below 80 yen. For Rubin, this was more familiar territory: he had supervised the currency traders at Goldman, and he knew both the fiscal and political risks. "These kinds of occurrences are not without consequences," Rubin said. A declining dollar tends to drive investors out of American stocks, bonds and Treasury debt, putting pressure on the federal government to raise interest rates. "It would take a while to show up, but I'm certain it would have happened," he said. ...Continued