THE OVER-VALUED DOLLAR AND THE U.S. SLUMP

The over-valued dollar poses a grave danger to the U.S. economy. A strong and durable recovery from recession requires a recovery in business fixed investment. This is being obstructed by the over-valued dollar which has undermined exports and business investment spending, and allowed imports to take market share from U.S. manufacturers. The over-valued dollar is also causing long term damage by eroding manufacturing which is a key engine of productivity growth. This augurs for lower future growth and living standards. U.S. policymakers must abandon the rhetoric of a “strong ” dollar, a rhetoric which sends misleading signals to foreign exchange markets. The Federal Reserve must work with its foreign counter-part central banks to lower the value of the dollar. China’s currency is under-valued and must be revalued upward, and Japan must cease using yen devaluation to try and escape its domestic recession. Longer term, there is need for a system of exchange rate management that prevents future damaging misalignments of exchange rates. Finally, trade agreements must have exchange rate provisions that guard against sudden currency movements which swamp agreed tariff reductions