By Ryan McMaken*
On February 8, the Japanese yen fell to its lowest level in 24 years against the dollar, falling to 143 yen per dollar. Little has changed since then, with the yen hovering between 142 and 144 to the dollar. In September 2021, 109 yen was enough to buy a dollar.
Overall, the yen has fallen 21% against the dollar over the past year, but Japan’s central bank apparently has no intention of changing course. Nor should we expect him to. Japan’s debt burden has become so immense that any attempt to raise interest rates or tighten monetary conditions would prove extremely painful. It is therefore not surprising that the BOJ is now positioned to become the last central bank in the world to cling to negative interest rates.
It’s not just Japan
The yen is slipping the most among the world’s major currencies, but it’s not the only one. Over the past year, the euro has fallen 14% against the dollar while the pound has fallen 13%. Even the Chinese yuan, which is subject to even more currency manipulation than Western central banks, fell against the dollar.
All of this means that we hear a lot about the so-called “strong dollar”, but not in a good way. Rather, the reputedly strong dollar is discussed in the context of how harmful it is and how we need to explore ways to make the dollar weaker as soon as politically possible.
Such talk should be strongly opposed, of course, because the dollar is not “too strong”. On the contrary, talking about the “strength” of the dollar is not really about the dollar at all. It’s about the weakness in other currencies and how other central banks have adopted even worse monetary policy than the US Fed. If, for example, other national governments and central banks fear that the dollar is too strong, these institutions are encouraged to adopt policies that will strengthen their own currencies.
Instead, we’ll hear about how the Fed needs to “do something” to weaken the dollar through more easy money and thereby stick it to Americans who hold dollars by decreasing their purchasing power. .
“We didn’t inflate currency X too much, it’s the dollar’s fault”
A perfect example of how this rhetoric works comes from Bank of Japan Governor Haruhiko Kuroda in July. As the yen really started to slide against the dollar, he felt that “it’s not so much yen weakness as dollar strength.” Kuroda spoke the words after years of negative rates, and just after the BOJ doubled down on buying “large amounts of bonds” to drive down interest rates and borrowing costs. Kuroda’s words also came weeks after the Swiss National Bank raised interest rates for the first time in 15 years. It was just one more example of the ECB’s complacency over other banks, and yet Kuroda then manages to say with a straight face that it’s all about the dollar.
This is the kind of talk we should learn to expect about the “strong dollar”. Central banks that devalue their currencies are not to blame, you see. It’s the dollar’s fault.
Other critics of the strongest are less explicit on this last point and aim instead to prime the pump to convince us all that a relatively weaker dollar is a bad thing.
Blaming a “strong” dollar rather than weak and inflated currencies
Consider a CNN article from earlier this month titled “America’s Strong Dollar Hurting Everyone.” The article makes many correct factual statements. She notes that when the dollar is relatively weaker, countries with even weaker currencies will have a harder time repaying dollar-denominated debt. There is a lot of debt in the world denominated in dollars, including sovereign debt. The article also rightly notes that weaker currencies will have problems importing goods and services when payments have to be made in stronger currencies. Think of the situation in Sri Lanka or Pakistan. Moreover, when a weaker dollar is due to relatively high interest rates in the dollar zone (as is currently the case), this can mean a flight of capital from countries with weaker currencies: investors want dollars invest in US securities with relatively higher interest rates. This is all true, and it’s bad news for those countries whose currencies make the dollar look good in comparison. But notice how the framing is to blame these problems on a “strong dollar” rather than weakness in other currencies.
As a final example, consider Friday’s CNBC article about how a “strong dollar is hurting investors.” Specifically, “a strong dollar reduces the revenue that companies earn overseas, because money brought in in the form of weaker foreign currencies is converted into fewer dollars.” Again, that’s technically true, but presenting this as a “strong dollar” issue is a weird way to go about it. The real problem here is not that the dollar is too strong. The problem is that investors have not properly anticipated the real risks involved in investing in these other countries where central banks are at least as irresponsible as the American central bank.
In all these cases, the problem is never that the dollar is “too strong”. The problem is that other central banks are even worse, and the depreciation of other currencies causes instability, loss of wealth and economic crises.
The fact that US central bankers – compelled by mounting populist pressures on US CPI price inflation – have moderately curbed US monetary inflation is hardly a reason to fight. against the supposedly Herculean strength of the US dollar. Instead, we should focus on the “weak euro”, “the weak yen” and the “tragic Sri Lankan rupee”. Nevertheless, the central bankers and their media allies try to make us believe that the problem is the strength of the dollar. America’s central bankers are guilty of a lot, but it’s not their fault that central bankers somewhere else are so often even more capricious.
If it all ended there, we might be able to view this as a missed opportunity to learn from a weak currency. But unfortunately, talking about a weak dollar often leads to political shenanigans. After Fed Chairman Paul Volcker dramatically raised interest rates in the United States in the early 1980s, the dollar became much stronger against foreign currencies. The so-called strong dollar problems quickly became a popular topic among politicians, both foreign and domestic. French, German, Japanese and British politicians then began to pressure the US government to devalue the dollar in favor of foreign currencies. Three years later, US government politicians bowed to pressure, spurred on by half-baked economic orthodoxy over the alleged value of a weak currency. American policymakers therefore adopted the Plaza Accord in 1985, and the US dollar began to lose value and purchasing power soon after. This, of course, has come at the expense of American savers and consumers. The inflationists won and a new generation learned that talk of a “strong dollar” is often quickly followed by calls for devaluation. It is unlikely to be different this time around.
*About the author: Ryan McMaken (@ryanmcmaken) is an editor at the Mises Institute. Send him your article submissions for the Wire updates and Power and market, but read the instructions in the article first. Ryan holds a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He was a housing economist for the state of Colorado. He is the author of Cowboys Cocos: The Bourgeoisie and the Nation-State in the Western Genre.
Source: This article was published by the MISES Institute