Dump the dollar?

Dump the Dollar?

IN ONE OF the presidential debates, Vice President Bush gave the clear impression that he just doesn't care about the dollar. A dollar shouldn't have any known value, he seemed to believe, in terms of anything. Those bold enough to hold claims to future dollars--U.S. bonds--should, on this view, consider the dollar like a lottery ticket.

Does it matter if the dollar keeps falling against other currencies? It certainly matters if the dollar's decline results in inflation, as in 1973-74 or 1979-80. It also matters if it makes American savers unload U.S. stocks and bonds in favor of mutual funds that invest in foreign treasury bills and bonds, which is precisely what happened last October. Some economists argue that any inflation arising from a lower dollar is merely a one-time adjustment, with prices jumping from one level to a higher level but then settling down. The trouble is that the adjustment in the external value of the dollar has gone on for three years now. If it is followed by an equally prolonged upward adjustment in the price level, how could the Federal Reserve sit back and ignore it? If the Fed did, wouldn't the dollar fall even further, provoking even more "one-time" increases in prices?

Why does a falling dollar have to mean inflation? It doesn't, if prices fall in the countries with rising currencies, but that too causes problems. Deflation abroad injures foreign economies, and weak economies can't buy much from the United States, or from the developing countries that buy from the United States. But unless prices do fall overseas, a falling dollar means exporters in other countries have to raise prices in dollars, just to get the same number of yen or marks. Producers in the U.S. can then raise prices too, since competition is reduced. Both import and export prices go up, and so do the prices of everything that competes with imports.

Is there anything that can be done to prevent such inflation? Sure. The Federal Reserve has to keep dollars relatively scarce, therefore valuable. Won't that raise interest rates? On the contrary, inflation raises interest rates. Countries with little inflation and strong currencies, such as Japan and Switzerland, have interest rates of 4 to 5 per cent on bonds and mortgages. If confidence in the dollar is restored, then private investors at home and abroad will gladly buy U.S. bonds at similarly low interest rates. If anyone wants to know how to do this, ask Federal Reserve governors Wayne Angell and Bob Heller. Or Jack Kemp.