Re: Prospects and consequences of a devalued USD
Source Jim Devine
Date 10/02/02/06:50

Dean Baker's comment on the Garten article:

Jeffrey Garten Inadvertently Presents the United States as a Developing Country: Over-Valued Dollar Version

Many developing countries have deliberately maintained over-valued currencies. This make imports cheaper for their elites. It also makes military goods cheaper, allowing belligerent leaders the opportunity to be more powerful.

The problem with over-valued currencies is that they are not sustainable. They make imports cheaper, pricing domestically produced goods out of the market. They also make the country's exports uncompetitive. The result is a trade deficit that will grow ever larger - compounded by the growing interest burden of a rising foreign debt - eventually forcing down the value of the currency. Often the devaluation of the currency is a huge embarrassment for the leaders involved, in many cases resulting in changes in government.

Jeffery Garten, a former top official in the Clinton administration, presents what must be the view of these developing country leaders when they are forced to confront reality and devalue their currency. After originally supporting a drop in the value of the dollar as an integral part of its deficit reduction program, the Clinton administration reversed course when Robert Rubin became Treasury Secretary and began to push for an over-valued dollar. The predictable result was a large and growing trade deficit. This trade deficit not only cost millions of manufacturing jobs (thereby putting downward pressure on the wages of non-college educated workers), it was also a key factor in the imbalances that led to the housing bubble and the current crisis.

Mr. Garten notes the inevitability of the dollar's decline (remarkably, he attributes the decline to the budget deficit rather than the unsustainable trade deficit) and then complains how it will reduce the influence of the United States in the world. In particular, he complains that the lower-valued dollar will reduce the power of the U.S. military in the world.

This is a fascinating account from a top economic official who was apparently willing to sacrifice the long-term health of the economy in order to temporarily increase U.S. military influence. It would have been helpful if the media had presented these issues more clearly so that they could have been the topic of public debate.

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