Saturday, April 22, 2017

Sean Rushton on the Dollar - Kemp Foundation

The Kemp Foundation recently held its forum on how best to reduce volatile currency exchange rates, especially in regard to the US dollar. Soon we will feature that forum and the information discussed and presented. But we can get an idea what the thinking is on this at the Kemp Foundation from this recent article in The Wall Street Journal by Sean Rushton. Mr. Rushton is the Director of the Kemp Foundation Project on Exchange Rates and the US Dollar. 

Below are a few excerpts from his article.

"As the U.S. economy slowly recovers from its low-growth hangover following the 2008 financial crisis, the Federal Reserve is gradually tightening monetary policy. Meanwhile, President-elect Trump and the Republican Congress plan to spur growth through deregulation and cuts in corporate and personal income taxes. Yet the Reagan years proved policy makers should watch out for another threat to the improving economy: a soaring dollar.
In the early 1980s, the Fed’s tight monetary policy along with the Reagan administration’s tax cuts caused the dollar to rise dramatically relative to other major currencies, appreciating more than 50% from 1980-85. As the exchange rate soared, inflation plummeted from 13% in 1980 to below 4% in 1983, and stayed low—a stunning and welcome disinflation.
After the 1970s era of dollar depreciation and inflation, the rising dollar was a boon to consumers, and the supply-side policy mix associated with economists Robert Mundell and Arthur Laffer made the economy boom. In 1984 real GDP rose 7.3%.
Once inflation was down, however, the future Nobel winner Mundell and his ally New York Rep. Jack Kemp highlighted a new hazard: the skyrocketing dollar. The exchange rate’s sharp appreciation—necessary to get inflation down—meant falling profits for U.S. multinational companies, reduced competitiveness for domestic manufacturers of products such as autos and electronics, and steep declines in output prices for commodities such as oil, farm products and steel."
. . . . .
"Now—with the Fed saying it will raise its target interest rate repeatedly in 2017, continued monetary easing in other large economies, and a new president promising big tax cuts in 2017—there’s a risk that the dollar will soar to dangerous heights. Since Election Day, the dollar is up more than 5%.
If the already-high dollar does rise significantly, how will it influence an economy with low inflation and low velocity of money, and still recovering from a deflationary financial crash? How will it affect U.S. exports, manufactures, commodities, and blue-collar jobs? How many global debt defaults will it generate, and how will they affect banks? Could a trade war erupt if China devalues by a large percentage in response? Will the soaring dollar offset the positive impact of supply-side fiscal policy, such as the Trump tax cuts? Or will markets tank in advance and force the Fed to retreat from normalizing interest rates?'
. . . . .
"Removing the prospect of big dollar swings would be an enormous benefit to the long-term productive economy. Less volatility among the large currencies, perhaps assisted with a common external target or shared monetary rule, would be a major step toward stabilizing our crisis-prone system, restoring normal interest rates, lowering trade frictions, and returning to broad-based economic growth."
My added comments: This article pretty well lays out the theme for the recent forum sponsored by the Kemp Foundation in Washington, DC. Dr. Warren Coats and Dr. Judy Shelton were both featured speakers at the event. It is pretty clear that most feel the current floating exchange rate system is flawed and needs to be changed. This is exactly what we cover here on this blog, the potential for major monetary system change in the future.

I am working on a series of articles to cover the overall forum, the presentation by Dr. Judy Shelton, and the presentation by Dr. Warren Coats. I have seen the presentations and they are very well done. 

My plan is to run these articles here over the next week and then re post them all in the first week of May so that they will stay visible to blog visitors for all of May. This forum was a great way to get experts who can clearly present their ideas all together in one place. That is a big help to those of us trying to learn about and understand these sometimes complex issues. I think readers here will benefit from the excellent presentations. I encourage readers to try and get others to read these coming articles because there is a lot of opportunity to learn quite a bit from these video presentations for the average person who would like to do so.

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