Ranking the Devils: Debt, Deficits, Dollar Weakness

From Forbes.com

Regarding a U.S. comeback, we're all told that debt is worse than dollar weakness. Debt has been demonized, yet bigger debt markets and more mortgages are a necessary part of the solution. Similarly, a large federal deficit is inevitable because of the recession's wallop to federal tax receipts. In contrast, dollar weakness isn't inevitable. It would be another bad Washington choice, a hammer blow to living standards and a terrible denouement to already devastating job losses and economic contraction.

Dollar weakness should get more blame than debt for the current crisis. During the 2002--07 Bush-era expansion household debt grew from $8.5 trillion to $14 trillion, an increase of 65% versus only a 33% increase in personal income. The assumption is that the debt growth was wasted on an era of excess, but it wasn't. Liquid assets, such as savings bonds, time deposits and direct stock holdings, grew 68% in that same period, from $15 trillion to $25 trillion. Consumption growth was generally less in this expansion than in the 1990s, when three-year-average real consumption growth hit 5% versus a peak of 3.4% in the 2000s.

Best Way Out of Deficits and Debt

A key step in the national rebuilding process will be to focus some of the fury now blistering debt and deficits onto the weak-dollar policies that keep riling the international financial system. Economic growth will require a rebuilding of innovation and economic freedom and, equally critical, a strong and stable dollar to attract capital back to U.S. assets.

Unfortunately, President Obama has already said that the dollar is "extraordinarily strong," implying a harmful risk of future weakness that was surely noted by investors and China's leaders. Treasury Secretary Tim Geithner, repeating the Bush Administration's weak-dollar phrases, has criticized China for keeping the dollar strong against the yuan and expressed openness to the IMF's basket currency, a backdoor slam at the dollar.

China, Europe and others are patiently but firmly calling for an end to the world's dependence on an unstable dollar. The best U.S. response would be a true policy of dollar stability through thick and thin. Yet the Obama Administration has already restated the horrible Clinton-Bush principle that the dollar should be valued by U.S. economic fundamentals, a recipe for self-reinforcing volatility. This will doom the U.S. and the world to needless instability and momentum-based capital flows. That's a future we should roundly reject in light of the wildly unstable dollar's contribution to the current economic calamity.