Is a strong dollar better than a weak dollar?

by on February 8, 2017 at 8:04 am in Economics | Permalink

Yes, for Americans though not for the world as a whole.  For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.  That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall.  If you owned lots of ponies, would you not want the price of ponies to go up?

A weak desire to substitute into imports could blunt this result somewhat.  Or in other words, American tourists will benefit to a disproportionate degree.

The down scenario is that a lot of emerging economies have too much dollar-denominated debt, and the second-order blowback from their potential insolvencies could hurt America too.

I am sorry this post did not come up at 3 a.m.

1 ant1900 February 8, 2017 at 8:07 am

A wise man once taught me to be skeptical of stories. What would that man say about anonymously sourced articles that confirm one’s existing biases?

2 anon February 8, 2017 at 8:50 am

“Anonymously sourced” are the new magic words.

The way I see it, many of these news organizations have 100+ year histories on “sourcing” and internal rules on doing it. I believe for instance that all old players require at least 2, and on important stories more, independent sources, even if none are willing to use their name in print.

The new web kids may go with 1 source, but that is where reports about “what Flynn said” cone from.

3 anon February 8, 2017 at 9:16 am

That is “not” where Flynn stories “come” from. Sorry for the confusion.

4 ant1900 February 8, 2017 at 10:02 am

I don’t think highly of Trump, but of all things I would expect him to understand, the business and economic implications of relative currency values would rank pretty highly.

We’re told constantly that Trump has substantial business interests outside the US but at the same time he’s not sure what the implications are of a strong or weak dollar. Okay.

5 anon February 8, 2017 at 10:20 am

We try to make sense of these things, as they roll in, now several times a day.

I personally think the best thing Trump can do for Trump is retire “for health reasons.”

Short of that he should keep his head down and have some practiced pols establish a new normal.

6 MOFO February 8, 2017 at 11:03 am

“I personally think the best thing Trump can do for Trump is retire “for health reasons.””

Yea, for the unforgivable sin of Being Donald Trump.

7 anon February 8, 2017 at 11:14 am

As I say, for Trump. It will only get worse.

https://twitter.com/PollsAndVotes/status/829108212406349824

8 anon February 8, 2017 at 1:24 pm

As he uses the bully pulpit of the Presidency to focus attention on one of America’s most pressing problems .. Nordstrom.

Official @POTUS account.

9 Borjigid February 8, 2017 at 10:20 am

I think that most of Trump’s overseas ventures are brand licensing deals where a developer in a foreign country pays to use Trump’s name on a building that is otherwise unrelated to Trump. The contracts may even be be priced in dollars. If not, I assume that it is still a fixed payment that is largely divorced from economic conditions, immediately converted to dollars at the prevailing exchange rate, and has no offsetting costs. So, I’m not sure that his business experience would help him here as much as might be expected.

10 Dino February 8, 2017 at 11:19 am

This seems to be the case most of the time, but his overseas business activities do apparently often include projects where he is more directly involved (the golf course in Scotland comes to mind).

Many people seem to assume that people in business, especially successful business-people, have knowledge of economics. This is not necessarily true, and often not true.

11 Alex Tabarrok February 8, 2017 at 8:23 am

Hmmm….if called, I would have given different advice. Trump says he wants to increase exports and reduce imports which means that for him a weak dollar is better!

12 Tyler Cowen February 8, 2017 at 8:24 am

And at 3 a.m. EST, you in fact would not have been asleep.

13 Alex Tabarrok February 8, 2017 at 8:31 am

True, we can optimally divide time so that one of us is always available to answer Trump economics questions. Marginal Revolution never sleeps.

14 Floccina February 8, 2017 at 9:21 am

+1 He could do much worse and probably will.

15 leppa February 8, 2017 at 9:34 am

It is much hours easier for MR not to sleep when the time difference between TC and you is 10.5 hours ( EST vs IST).

16 Benny Lava February 8, 2017 at 8:28 am

Exactly right. Strange that so many conservatives want a strong dollar but more exports.

17 Chappyy February 8, 2017 at 10:15 am

I think it’s because it sells better politically. Even if Trump wants a weak dollar most Americans don’t want to hear that. The political selling point is America is strong or exports will grow since most Americans don’t understand the economic implications. At the same time, I’d expect a strong dollar and weak imports also implies higher inflation or at least higher prices for goods. I’m not sure most mid- to low-income people would like that, but again, I’m not sure most people understand the implications.

I actually find Tyler’s strong dollar answer so vexing because he has been so strongly in the camp of “nobody–even smart people” really understand the implications of the destination based cash-flow corporate tax revisions. I think a secondary implication of this stance is that nobody really knows if a strong dollar or weak dollar is preferred because otherwise we have a lot more certainty around the efficacy (or lack thereof) of the DBCF.

18 rayward February 8, 2017 at 8:52 am
19 rayward February 8, 2017 at 9:04 am

I must say that the description by Doris Kearns Goodwin of FDR and a besotted and naked Winston Churchill discussing strategy to defeat the fascists at 3:00 a.m. in the White House is far less alarming than Mike Flynn and a naked but sober Donald Trump discussing whether it’s better to have a strong dollar or a weak dollar at 3:00 a.m. in the White House.

20 Graham February 8, 2017 at 8:33 am

Perhaps MRUniversity could do a video on this? One that could loop on CNN/Fox in the wee hours?

21 LLm February 8, 2017 at 8:36 am

“Is a strong dollar better than a weak dollar?”

… Is a sound, stable currency better than an unsound, unstable currency ?

This type of basic questioning apparently keeps economists awake at night.

What does Janet Yellen think about it ?

22 Borjigid February 8, 2017 at 9:20 am

Money has three functions- medium of account, medium of exchange, and stable store of value. In the contemporary US, there are many other assets that serve as stable stores of value, but only money has widespread use as a medium of account or exchange. To me, this indicates that the latter functions should be prioritized.

In particular, the combination of sticky nominal wages and money’s status as the medium of account make counter-cyclical monetary policy vital to economic health.

23 ladderff February 8, 2017 at 10:33 am

This is almost exactly backward. There are many other assets that serve as “stable” stores of value because the stock of that which we call money is not stable. By far the most significant “stores of value” are housing and corporate stock (also university degrees but that’s another story), and having the prices for these things be much higher than they would otherwise be because people use them as ersatz money is distortionary and, of course, very unstable.

Another way to put this is, analytically the store of value function trumps those other functions you mentioned.

24 A Definite Beta Guy February 8, 2017 at 11:34 am

????? Why would money’s function as a store of value trump other functions when the US economy has deep and liquid capital markets? If you want to save, you have a variety of vehicles in which to do so.

Certainly we’re not going to DEFALTE the currency just to increase the value of the currency. That would be insane.

25 Borjigid February 8, 2017 at 12:56 pm

If I’m understanding your argument correctly, you are saying that in an undistorted economy where currency stability was paramount people would hold their savings in currency, rather than real estate or equity. By implication, this would lead to more efficient economic outcomes than the current economy. Is that accurate?

If so, I’d say that you’re ignoring the opportunity cost, the business cycle, and much else.

26 MikeJa February 8, 2017 at 8:40 am

Isn’t the right answer a Goldilocks dollar – not too strong, not too weak? Either deviation leads to inefficiencies which inevitably hurt the US in the long run. I have no idea what the Goldilocks rate would be and I don’t feel I’d be very helpful in the Whitehouse

27 Chris February 8, 2017 at 8:43 am

Anyone with a spec of humility would be helpful in this whitehouse.

28 The Other Jim February 8, 2017 at 9:14 am

You mean the 9 straight years of blatant narcissism is wearing on you?

29 anon February 8, 2017 at 9:21 am

The cute thing about RWNJs is the way they adopt magic words in unison, and how they do it so often after a solid blow has been landed against them.

“Trump is a malignant narcissist.”

Well, call everyone else a “narcissist.” Behold the power of a magic word.

See also the way the RWNJs now use “fake news.”

30 Anonymous February 8, 2017 at 9:36 am

Guess that 4 plus 4 is 9 is the new Mantra.

31 JWatts February 8, 2017 at 9:41 am

“Guess that 4 plus 4 is 9 is the new Mantra.”

Or he meant 4 + 4+ 1, as in Trump is a narcissist replacing the previous narcissist.

32 Anonymous February 8, 2017 at 12:51 pm

@ Jwatts

Yes, you are right . Mea culpa.

33 anon February 8, 2017 at 9:38 am

Trump at the law enforcement conference today: “I was a good student. I comprehend things very well, better than, I think, almost anybody”

34 Turkey Vulture February 8, 2017 at 10:38 am

“I think that I’m a better speechwriter than my speechwriters. I know more about policies on any particular issue than my policy directors. And I’ll tell you right now that I’m gonna think I’m a better political director than my political director.”

35 anon February 8, 2017 at 10:42 am

Which one would you say can deliver a well written speech?

36 JWatts February 8, 2017 at 9:46 am

“Isn’t the right answer a Goldilocks dollar – not too strong, not too weak? ”

+ 3 bears

37 prior_test2 February 8, 2017 at 8:44 am

‘Yes, for Americans though not for the world as a whole.’

Not for Americans in manufacturing industries.

However, for Germans, Koreans, Japanese, Chinese, etc. working in manufacturing, the strong dollar has been a generation long god send. And the strange thing is, if you asked any of those people, they would likely insist that the strong dollar is pretty good for their world – tjhough not good for America (not that mercantilist German industrialists are likely to talk about it in public much).

Particularly as the strong dollar means that competitive devaluation is not needed, which is quite disruptive to trade.

38 JWatts February 8, 2017 at 9:44 am

” they would likely insist that the strong dollar is pretty good for their world ”

Yes, but how does the southern portion of the EU feel about German mercantilist trade policies? Is is just the German boot with a different type of leather?

“Study says Germany profited from Greek crisis
BERLIN — The German government profited from the Greek debt crisis, concludes a study by a leading German economic think tank that counters complaints by Europe’s largest economy that it unfairly bore the brunt of Greece’s financial troubles.

Calculations by the Halle Institute for Economic Research (IWH) found that Germany “benefited significantly from the European/Greek debt crisis,” and that Berlin’s first balanced budget in 40 years was “largely the result of lower interest payments” on public debt.

“Bad news in Greece was good news for Germany and vice versa,” the study concluded.”

http://www.usatoday.com/story/money/2015/08/11/greece-debt-crisis-bailout-germany-benefits/31449779/

39 Wandering Logic February 8, 2017 at 8:52 am

As Alex points out, a substantial portion of Trump’s supporters are short ponies, not long.

40 AlanW February 8, 2017 at 9:01 am

Isn’t the dollar always going to be overvalued (relative to America’s economic performance) as long as it is the world’s reserve currency? Maybe ending that status is what Trump is really after. If so, I’d have to think his team is off to a good start.

41 ladderff February 8, 2017 at 10:38 am

The dollar will not be the world’s reserve currency forever or even the rest of my life, and that is a good thing overall. (Before the United States conquered the world, they used this shiny stuff called gold for a global reserve currency, and that worked out pretty well.) The questions are, how much will Americans suffer in the transition, and will they be better for it in the long run? To some degree that is up to us as a polity. We’ll probably screw it up.

42 gab February 8, 2017 at 12:15 pm

“The dollar will not be the world’s reserve currency forever or even the rest of my life…”

You’ll have to let us know how old you are so we can make bets and know whether to root for the dollar or your death.

43 anon February 8, 2017 at 9:05 am

An important aspect to this Flynn story is that Trump keeps going to military and law enforcement venues. He is going again today:

https://twitter.com/realDonaldTrump/status/829315036329963521

Maybe those who used to worry about things enforced “by the barrel of a gun” still should. Worry, that is.

When he wanted to plan the economy, he asked a general.

44 anon February 8, 2017 at 9:08 am
45 derek February 8, 2017 at 9:17 am

It is all academic. The only thing that matters is the ability of the US to continue borrowing obscene amounts of money at almost no cost. A strong dollar essentially reflects strong demand for US treasury bonds.

Those wall street guys are going to rue the day that they didn’t give Trump bundles of cash for his election.

46 David K February 8, 2017 at 9:22 am

It always amuses me that the following two phrases are equivalent:

1) The currency is weakening
2) The terms of trade are improving

and yet thanks to the connotations of the words “weakening” and “improving”, I’m sure if you polled it, most Americans (not just the president) would be against 1 and for 2.

47 Borjigid February 8, 2017 at 12:57 pm

+1

48 Meets February 8, 2017 at 9:30 am

“I am sorry this post did not come up at 3 a.m.”

Unacceptable.

I had my alarm set and everything.

49 Lord February 8, 2017 at 10:00 am

Confuses income with wealth. Income is more significant than wealth, so you want those ponies coming in, not worry about about those you already have.

50 derek February 8, 2017 at 10:11 am

The people with all the ponies tried to buy themselves another one and she turned out to be a donkey.

51 Scott Mauldin February 8, 2017 at 10:11 am

This is based on a rather mercantilist fallacy that a country can be treated as a firm that wants to maximize sales and minimize purchases; the currency is not a good to sell, but rather a medium of exchange.

52 Todd Kreider February 8, 2017 at 10:32 am

Yep.

I’m not sure why Cowen writes things like this although obviously certain groups would benefit in the short run.

53 Nick_L February 8, 2017 at 10:24 am

“If you owned lots of ponies, would you not want the price of ponies to go up?” Well, TBH I’d prefer to see the demand for Ponies go up. Having lots of expensive Ponies sitting around is, well.. expensive. Reading of Trump’s activities, and now the mention of Ponies, I’m reminded of the quote ‘he flung himself upon his horse and rode madly off in all directions.’

54 collin February 8, 2017 at 10:26 am

Yes, for Americans though not for the world as a whole.

1) It has been good for the top 50% of Americans not necessarily bottom 50%.
2) If it is not good for the world, why doesn’t the world change? Probably because a strong dollar is good for certain nations (say China today or Japan INC. from 1983 – 1987) and then suddenly it is not good for that nation. (China has not reached that point.)
3) Is a strong dollar good? I always looked at strong currency/hard money vs weak currency/low rates similar to running vs passing in football. In a good economy (or your team is leading) the offensive wants a strong running game to control the clock and game tempo, all the while not turn the ball over. In a good economy, you want to avoid malinvestment and misallocation of labor. In a poor economy (or your team is losing) the economy needs to make up points quickly and has to take more risk. The labor market needs to grow and an increase with investment is needed and risks of malinvestment is less.

55 Turkey Vulture February 8, 2017 at 10:31 am

You’re ignoring any distributional consequences, which is convenient if you believe that a stronger dollar is in your own interest. But a weaker or stronger dollar doesn’t have a uniform impact across all Americans regardless of skills, geographic location, income, and wealth.

Can’t there be a story where a weaker dollar leads to a hit to total wealth, but that hit is disproportionately borne (in both absolute and even in “relative to wealth” terms) by the wealthiest members of society? And that it leads to a shift and expansion in economic output that disproportionately benefits the less-wealthy members of society? “Currency strength as distributive issue” should not be ignored.

56 anon February 8, 2017 at 10:40 am

We haven’t talked about it at MR but a few reports last week claimed that automation has had a much higher impact on US workers than low wage competition.

I think your question comes down to that, and if less imports or more exports still does benefit the less-wealthy members of society.

https://mic.com/articles/167727/what-is-the-biggest-threat-to-american-jobs-hint-its-not-immigrants

57 Turkey Vulture February 8, 2017 at 10:55 am

The issue goes beyond that. Tyler describes a currency devaluation as a hit to wealth. And I think it is understood that it is a hit to wealth that may lead to an uptick in economic activity, as domestic output becomes more competitive. Well, who gets hit by the wealth hit? People with wealth, and in particular people with wealth that might be used on tradeable goods or services, or who might be invested abroad. That is not your median American.

Even if the subsequent boost to income is spread uniformly across society, or indeed even if it favors the wealthy, it can still on net make the less-wealthy comparatively better off, so long as the boost isn’t as disproportionately wealthy-people-favoring as the pre-devaluation distribution of wealth.

58 anon February 8, 2017 at 11:12 am

Possibly, but if our goal is to help the economically disconnected, let’s keep our eye on that ball.

What if the “jobs bills” can get more to the rural poor than can currency manipulation?

59 Turkey Vulture February 8, 2017 at 11:29 am

And what if a jobs bill can get more to the rural poor with currency manipulation?

Besides, the strength or weakness of the dollar isn’t usually being discussed in the context of unilaterally manipulating the currency. It is in the context of claims that another currency is being manipulated, disadvantaging the US. If the approach is “well a stronger dollar is always good,” I guess the upshot is that we never even try to get other countries to stop claimed currency manipulation? Or perhaps the upshot is “we would never manipulate our own currency,” but then how do you negotiate with those who are manipulating their currency? You can’t if you aren’t willing or able to credibly threaten retaliation.

60 anon February 8, 2017 at 11:41 am

I think one thing to say is that a country’s currency is their currency. Just like ours is ours. They can manage theirs just like we can manage ours.

What is manipulation? Successful management by someone else?

The second thing to say is that management is hard. Not only is it fuzzy what is best, it is fuzzy what can be achieved.

So all in all I am pretty skeptical that “currency” is a big secret lever that we have never pulled, or is currently dialed to “rich.”

If we need jobs for low marginal productivity workers, create those jobs. Tax the rich, including possibly by border adjustment.

61 Turkey Vulture February 8, 2017 at 11:55 am

I can agree that, practically speaking, the room to use currency manipulation or counter-manipulation to achieve certain distributive ends is probably close to non-existent, because of all the uncertainties and complexities involved.

But it needs to be recognized that changes in currency values, and the general strong vs. a weak dollar discussion, have distributive consequences. Tyler has discussed the issue, here and in his Brexit posts, as if there is a uniform society-wide impact from changes in currency values. Which seems plainly false to me. There may be non-currency policies that arise which have potential current-strength implications, and the distributive issue should not be ignored in those situations. It may make what was thought to be economically irrational support for a policy (due to assuming a uniform impact) suddenly appear economically rational.

62 A Definite Beta Guy February 8, 2017 at 12:31 pm

I think the issue here is that currency manipulation affects measures besides the value of the dollar and the balance of trade. Dumping more dollars on the market to lower the value of the dollar isn’t just a reallocation of wealth towards lower classes, it’s an inflationary policy that affects every creditor.

63 JWatts February 8, 2017 at 10:42 am

“You’re ignoring any distributional consequences, which is convenient if you believe that a stronger dollar is in your own interest. But a weaker or stronger dollar doesn’t have a uniform impact across all Americans regardless of skills, geographic location, income, and wealth.”

Indeed, it’s not even evenly distributed across the states. It’s likely a strong dollar is bad for Ohio, but great for California.

64 Turkey Vulture February 8, 2017 at 10:47 am

Yes, we are a currency union. That may have efficiency benefits as a whole, but it comes at the cost of distributional consequences for geographic sub-units of that union.

65 Peldrigal February 8, 2017 at 10:45 am

I thought that export trends reflected productivity differentials, and that’s why the Germans were never worried by a strong Euromark.

66 Chris S February 8, 2017 at 11:23 am

In Trumpland, this is a very easy question.

Strong Dollar is Strong.
Weak Dollar is Weak.
Strong is better than Weak.
Therefore, we want a Strong Dollar.

Why all the fuss?

67 ladderff February 8, 2017 at 5:54 pm

Looks like you got Trump all figured out!

68 Thiago Ribeiro February 8, 2017 at 11:38 am

So America will benefit and be harmed. And then the economist lost his arm and was fired because he couldn’t say “on the other hand…” anymore.

69 Turkey Vulture February 8, 2017 at 11:42 am

“First, assume a prosthetic limb…”

70 Thiago Ribeiro February 8, 2017 at 12:29 pm

+1

71 spencer February 8, 2017 at 1:26 pm

In many ways currency movements are just like interest rates, A strong dollar is restrictive to domestic economic activity just as high interest rates are, while a weak dollar tends to stimulate domestic economic activity. The impact on inflation and income redistribution of currency moves is also like that of interest rate changes. A strong or a weak currency is not always bad or good. It depends on what your economic position is and in what direction you want the economy to go.

72 We live in interesting times February 8, 2017 at 1:53 pm

I’m old enuf to remember when Europe complained the $ was too high and the $ was too low.

They just weren’t happy either way.

73 rayward February 8, 2017 at 4:36 pm

I will do my best imitation of Cowen and defend Trump’s choice of Mike Flynn to discuss the merits of a strong dollar vs. a weak dollar. Read this (also linked at my comment above): https://www.nytimes.com/interactive/2017/02/07/business/china-bank-foreign-reserves.html?ref=business That’s not to suggest that Mike Flynn’s advice about China is the best advice available, but he is Trump’s choice for national security adviser; indeed, I’d rely on Cowen for national security advice before I would rely on Flynn. .

74 CKB February 8, 2017 at 5:03 pm

Well, you’re not the first economist to commit the Fallacy of Division. The nation as a whole, I suppose, is “long dollars.” Certainly everyone in it is not, and certainly a strengthening dollar produces winners and losers. I do think that even a quick thought experiment owes a little more consideration to who loses, by how much, and how well they can afford those losses.

75 Jackson Layers February 10, 2017 at 4:24 am

To be fair, I don’t worry much, as I do trading and for me, it’s greater either way just that I need to be certain of which way! I find it easier to work out through this blog and my broker OctaFX, as they too have daily market updates from experts and all that is how I can get to right decision and bring myself fair amount of rewards too! I truly enjoy it in every way and make me feel absolutely comfortable and relaxed with doing everything.

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