The Devaluation Delusion Revisited

"The dollar is our currency and your problem." So America's Treasury Secretary quipped before President Nixon pulled the plug on the Bretton Woods system three decades ago. What John Connolly's bluntness reflected was America's ability--and willingness--to export its economic problems by driving down the dollar's value while scapegoating countries opposed to that strategy. President George W. Bush seems hell-bent on repeating Nixon's misbegotten policy.

Like the Nixon/Connolly team, the Bush administration is responding to America's massive budget and trade deficits by letting the dollar fall--and hard --while it also tries to distract attention from its responsibility by pointing an accusing finger at China as the cause for both US joblessness and deflationary pressures. This strategy, however, is likely to prove as ineffective now as it was for Nixon, who succeeded only in ushering in an era of stagnation.

Bush's policy is doomed to fail because, as in the 1970's, America's economic problems are homegrown. They are not imported and cannot be fixed merely by changing the dollar's value.

The world's reliance on the US as the one source of growth in global demand buttresses America's currency power play, but at the cost of aggravating vast global imbalances. Since 2000, America's excess productive capacity has outstripped the Euro area and Japan combined, its economy growing far more slowly than its 3.5% to 4% annual potential, with US unemployment rising. This pitiful performance incites angry cries that American jobs are disappearing abroad, and that low-cost exports may result in deflation.