Every time I read an article or listen to a discussion about the dollar, I realize I'm living in a parallel universe.
In that other world - the one where I clearly don't live - the value of the dollar is determined by what the U.S. Treasury secretary says and by his ability to say one thing (a strong dollar is in the best interest of the United States) and mean another (an orderly decline would be nice) without looking utterly foolish.
Bob Rubin, the former Goldman Sachs Group Inc. chief, set the gold standard for the "strong dollar policy." Of course, his reign at Treasury happened to coincide with a period in which the dollar, after dropping to an all-time low of 79.75 Japanese yen in April 1995, rallied for the next seven years.
A strong dollar may have been in the best interest of the United States; it was also driven by economic fundamentals.
Rubin's successors have been somewhat less successful at the fine art of dissemblance. Until Hank Paulson, another Goldman alum, took over in July, President Bush had turned to titans of heavy industry - Paul O'Neill of Alcoa Inc. and John Snow of CSX Corp. - for the top Treasury post.
O'Neill wasn't one for mincing words, especially silly ones. He got pilloried for saying the foreign-exchange market sets the value of the dollar. Currency analysts spanked him, saying he should have known better (than to state the obvious?).
Snow was a somewhat better salesman, but he was fighting a tide that was taking the dollar out to sea.
Call me old-fashioned, but in my world, the value of the dollar is ultimately determined by the stance of U.S. monetary policy relative to that of other countries (the supply of dollars, in other words); the real rate of return offered on dollar investments; interest rate differentials, current and expected, among countries; savings rates; trade flows; and even some touchy-feely stuff, such as faith in a country's ability to pay its debts and confidence in its political system.
The Treasury doesn't set interest rates, nor does it make tax and spending policy. Other than express the administration's preferences, it has no real power over the dollar.
But like a magician, the government wants to maintain the illusion that it has some say in the dollar's direction.
Isn't it about time we can this charade? Like his predecessors, Paulson has been forced to pay lip service to the Rubin mantra. It's a shame, because it distracts him from his mission of encouraging China to liberalize its markets. Maybe its time to forget Rubin and channel John Connally, Richard Nixon's Treasury secretary, says Lou Crandall, chief economist at Jersey City, N.J., research firm Wrightson/ICAP.
"The dollar may be our currency, but it's your problem," Connally said. While he made that statement in 1971, it may applicable today.
"Europe is the one to be worried," Crandall says. "They're happy their economy is improving. They're not anxious to see it choked off" by a strong euro.
Connally's quote probably wouldn't fly in this environment. Anything that smacks of U.S. hegemony, that implies the United States is washing its hands of a problem it presumably created, would be considered politically incorrect and would alienate the few allies we have left.
Then again, supporting a strong dollar because it "is in the best interest of the U.S." isn't a strong endorsement of multilateralism either.