Memo To The Federal Reserve And The Treasury Department, Too—It's The Dollar, Stupid

Key Concepts

• Dollar stability as a primary economic concern
• Inflation as a devaluation of currency
• The Federal Reserve's role and perspective on economic growth and inflation
• Fixed vs. floating exchange rates
• The dollar's role in international trade and potential alternatives
• The importance of a stable dollar for stable prices

The Dollar's Importance

Steve Forbes argues that the state of the dollar should be the number one concern of the Federal Reserve, Treasury Department, and the White House. He references James Carville's "It's the economy, stupid" slogan from Bill Clinton's 1992 campaign to emphasize the dollar's critical role. Forbes asserts that a weak dollar leads to inflation and economic instability, stating, "Strong nations don't have weak currencies."

The Problem: A Feeble Dollar

Forbes points out the concerning fact that US short-term interest rates are higher than those in the European Union and Britain, yet the dollar remains weak against the euro and the British pound. He defines inflation as the lowering of a currency's value through excessive creation. He attributes the dollar's weakness to a lack of market faith, which fuels discussions among BRICS nations (Brazil, Russia, India, China) about finding alternatives to the dollar for international trade. He warns that if the dollar isn't strengthened, stablecoins could emerge as monetary alternatives, challenging the US government's monopoly on money.

The Solution: Dollar Stability and Monetary Policy

Forbes quotes former World Bank president David Malpass, who succinctly states, "A stable dollar means stable prices." He suggests Malpass as a potential replacement for Fed head Jerome Powell. Forbes criticizes the Federal Reserve's belief that economic growth causes inflation, arguing that the institution has a bias against a vigorously expanding economy. He believes the Fed is "oblivious to the basic importance of a stable dollar."

The Nature of Money

Forbes emphasizes that money measures value, similar to how a scale measures weight, a clock measures time, and a ruler measures length. He clarifies that money is not a commodity like wheat or gold, nor is it like a stock whose value fluctuates with the economy.

Fixed vs. Floating Exchange Rates

Forbes contrasts the pre-1970s era of fixed exchange rates, which he says led to unprecedented global prosperity, with the current system of floating, unstable exchange rates. He argues that floating rates distort trade patterns and divert talent towards profiting from financial instability, citing the $7 trillion daily volume of currency trading. He quotes Judy Shelton, who observes that profits are found in "arbitrageing fleeting opportunities in unsettled financial markets," which Forbes considers a waste of talent.

The Political Dimension

Forbes agrees with President Trump's assessment that Fed boss Jerome Powell is playing politics with interest rates. He urges Trump to emphasize that the fight is not just about interest rate levels but about maintaining a strong and stable dollar.

Conclusion

The main takeaway is that a strong and stable dollar is crucial for economic stability and prosperity. The Federal Reserve's focus should shift towards maintaining dollar stability rather than solely focusing on controlling inflation through interest rate adjustments. The current system of floating exchange rates encourages unproductive financial speculation, and a return to a more stable monetary system could unlock significant economic potential.