The strong dollar, warns Larry Fink, CEO of BlackRock in a letter to be released to shareholders next week, “will lead to an erosion of confidence on the part of CEOs, with the potential to slow both investment decisions and future growth in the U.S.” When you manage almost $5 trillion in assets, and monitor perhaps twice that much for the U.S. Treasury and other institutions, and are variously described as “possibly the most important man in finance today “ and “the first phone call for governments and businesses around the world with questions”, attention must be paid to your views on the problems and direction of the economy -- and not only America’s. But keep in mind the warning of that great philosopher, the milkman Tevye. In “Fiddler on the Roof” he explains one of the reasons why he wishes he were a rich man: “The most important men in town … would ask me to advise them, and it wouldn’t make one bit of difference it I answer right or wrong. When you’re rich they think you really know!”
Fink, however, may really know. He is not alone in worrying that the strong dollar is hurting American exporters and, by extension, overall business confidence. Fed chairwoman Janet Yellen was surprised by the rapidity of the plunge in the euro, which fell 4% in the five days after the European Central Bank started its QE program, and has fallen 25% in the past year. And Treasury Secretary Jack Lew, annoyed with South Korea for artificially depressing its won and our other trading partners for not doing more to stimulate domestic demand, sides with Fink, who is also joined by the nation’s farmers and manufacturers such as Caterpillar, heavily dependent on overseas sales of construction equipment. Both the soil tillers and the dirt mover traditionally press for dollar depreciation every time the value of the greenback ticks up, and have new allies since last week when the most recent US jobs report disappointed, in part, some analysts say, because of a drop in exports and the ripple effect that Fink describes. Devaluation is also attractive to politicians and central bankers dissatisfied with the growth rates being recorded by their economies.
Unfortunately, there are at least two potholes on the road to growth via the path of currency devaluation. The first is that our trading partners are not going to sit idly by forever while we gain advantages in world markets by making the dollar cheaper. It was a long time in coming, but euroland and Japan finally decided that the policy of the Federal Reserve Board -- run the presses to stimulate domestic growth and, oh yes, drive down the value of the dollar -- had to be matched. So the central banks of both Japan and the Europe retaliated, and are now driving down the yen and the euro, relative to the dollar, in an attempt to stimulate exports to the U.S. and, thereby, economic growth.
The second reason to pause before devaluing is that keeping the value of a nation’s currency below the rate set in a more open market only masks the basic problems of an economy. China, perhaps one of the great currency manipulators of the modern age, kept the yuan at an artificially low level for decades. This stimulated exports while depriving ordinary Chinese consumers -- the affluent managed to afford their designer clothes and scrape together enough foreign currency to buy bolt-holes around the world -- of a sufficiently valuable currency to enable them to import the goods that were simply too expensive in yuan terms. And China is now paying the price for this artificially created, export-led growth. Inefficient companies, buoyed by a cheap currency rather than efficient production techniques, dominate the economy, requiring greater and greater subsidies in order to survive in globalized markets. Companies dependent on governments for their survival eventually find it expedient to, er, “cultivate” government officials, who in turn find it personally profitable to keep their new-found benefactors alive. Corruption is piled on inefficiency, and the mess takes sorting out that often involves less than complete respect for Western-style judicial niceties.