Does The US Government Really Want A Strong Dollar?

US Treasury Secretary Timothy Geithner says he is in favor of strengthening the dollar, yet extensive government spending and low interest rates contradict Geithner's rhetoric. Moses Kim points out that the US may not want a strong dollar because it would make servicing the record US debt more expensive. See the following post from Expected Returns.

I just can't help but laugh at the utter hypocrisy of government officials. How can you claim to support a "strong dollar" while enacting policies that contribute to record budget deficits? I think all Americans support a strong dollar, but right now we need firm action from our leaders, not just talk. From Reuters, Geithner wants strong dollar, will tackle deficit:

Treasury Secretary Timothy Geithner said on Wednesday he believes strongly in the need to maintain a strong dollar and said the United States was determined to get its budget deficit down.

The dollar's decline has been a source of concern in the export-heavy region, especially since top exporter China keeps its currency's value closely managed against the U.S. dollar and so felt less impact on prices for its exports than other Asian nations that let their currencies float freely.

"I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar," Geithner said in a meeting with Japanese reporters at the U.S. embassy.

From Geithner's statement, you can see that he understands the correlation between budget deficits and a weak currency. This flies in the face of the views of Paul Krugman who thinks that deficits don't matter anymore, and that government spending can offset productive slack in the private sector. All government spending has done so far is distort economic statistics and convince the public that the recession is over.

A "strong dollar" policy makes for a good sound bite, but it is inapplicable in reality. What does a strong dollar entail? It means debt servicing becomes increasingly expensive in real terms, which is the equivalent of economic suicide when you are the most overdebted nation in the history of the world. There is absolutely no way our government supports a "strong dollar"; if they really did, you would see interest rates at much higher levels right now.

Consumer Will Not Participate In Recovery

Geithner said the reality was that if a still-struggling recovery was to be turned into sustainable future growth "it will have to be less driven by the U.S. consumer" because heavy levels of debt were forcing American consumers to save more.

Geithner cited signs of stabilization in the global economy but said it still needed the stimulus that governments around the world have poured in to foster stronger growth.

Geithner is right- the American consumer will not lead us out of recovery. This begs the question: what will lead our economy out of this recession? Our manufacturing base has been gutted over the past generation of overconsumption, and it will take years for us to start to produce again and run trade surpluses. Of course the answer is the government, with its technology of the printing press.

What we really need is a period of fiscal discipline where individual households and the government get their respective financial houses in order. Savings, or deferred consumption, are the true foundation of growth. By loading our balance sheet with debt, we are guaranteeing protracted economic stagnation. Consequences, consequences, consequences. You can be sure that post-Baby Boom generations will pay the consequences of government ineptness.

This post has been republished from Moses Kim's blog, Expected Returns.