Memo To: Gene Sperling, National Economic Council
From: Jude Wanniski
Re: Strong Dollar
On Jan. 23, I faxed you a memo asking you to warn the President that his statements of satisfaction with the "strong dollar" now are less helpful than they have been in the past. Once the dollar breeched gold at $350, which I believe is its equilibrium price — balancing global inflationary and deflationary forces — my concern is deflation. The gold price falls, Gene, because the dollar is becoming scarce relative to gold, with other commodities following. There is not a terrible problem with gold at $340, but the fall in the gold price has exponential effects, undermining the delicate web of contracts that comprise the world monetary system.
Please note Jonathan Fuerbringer's report in today's NYTimes, which points out that the dollar is not weakening even though Bob Rubin sounded off about it last week, and the G-7 participants echoed his sentiments about the dollar being strong enough. The piece is written from a perspective rather different than mine, but it does note that the one way to prevent the dollar from strengthening further is for the Fed to lower the funds rate, now at 5.25%. It does this with the quote by John Lipsky, chief economist of Chase Manhattan: "'The notion that there may be some new policy action behind the new policy is highly inconceivable,' Mr. Lipsky said, adding that he would not expect the Federal Reserve to undermine the dollar by lowering its target for short-term interest rates."
Undermining the dollar? It's clear from Fuerbringer's choice of the word "undermining" that he is as confused as Bob Rubin. If Rubin and the G-7 want to arrest the dollar's climb against the yen and D-mark blocs, either the Fed has to lower the funds rate to 5% (and maybe lower) or the other central banks have to tighten monetary policy more than the Fed now is tightening, by denying dollar liquidity to a thirsty world market.
Please note in the Fuerbringer article that the G-7 appeared to arrest the strengthening of the yen on April 25, 1995 by issuing a statement saying the dollar had gotten too weak against the yen. The yen did begin its long decline against the dollar from that point — as we advised our clients at the time that it would — only because we observed the Bank of Japan shift gears and begin injecting yen liquidity into its extremely thirsty banking system.
What should you do? Alert the President that even while the markets expect Greenspan may have to tighten monetary policy next month by raising the funds rate, which is what the bears on Wall Street are selling, that he should ask Greenspan why he isn't cutting the funds rate by a quarter point ~ not to undermine the dollar, but to arrest its overcooked appreciation.
The other way you can arrest the appreciation of the dollar is by having the President denounce the idea of a broad-based cut in the capital gains tax. That would collapse the stock market and induce a sudden decline in the demand for dollar liquidity. That's something I don't think he would prefer.