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Conventional Wisdom Dies
THE DEATH OF CONVENTIONAL WISDOM
By Wayne Jett (c) November 21, 2007
    In the good ol’ days, conventional wisdom was a pejorative expression implying the majority viewpoint lacked vital insight. No longer. Today, conventional wisdom in financial and economic matters has become an oxymoron. Wisdom is nigh impossible to find in mainstream rhetoric of the financial media. Examples? You want examples? One needs only to observe the daily discourse.
The Journal Reports, You Decide
    The Wall Street Journal reports a weak dollar will not be inflationary. Why? “A key reason: Foreign exporters are so keen to keep U.S. market share that when the dollar weakens, they often lower their prices to keep them constant after the currency effect. That's especially true when the economy is slowing and consumers are less willing to pay higher prices.” So, we are led to think, it makes no difference if the dollar’s value is being inflated, because producers of other countries willingly cut their prices.
    On the other hand, economic pundits similarly assure that the weakened (less valuable) dollar is the great benefactor responsible for reducing the U. S. current account deficit. Americans are selling more in foreign markets while buying fewer foreign-made products, they contend, because those imports are now more costly. So, which is it? Is the weaker dollar non-inflationary, or are foreign imports more costly?
Dr. Feldstein Opines
    In an interview on Bloomberg television November 19, Dr. Martin Feldstein, professor of economics at Harvard University, president of the National Bureau of Economic Research and former chairman of the council of economic advisers to President Ronald Reagan, opined that the less valuable dollar is quite beneficial to Americans. Dr. Feldstein said the weaker dollar is stimulating economic growth during what may otherwise become a recessionary slowdown, and it is doing so by enabling more U. S. products to be sold abroad while reducing purchases of foreign goods. When asked about Treasury secretary Paulsen’s frequent public statements that U. S. policy favors a strong dollar, Dr. Feldstein said such statements are mere rhetoric and do not reflect actual policy.
    Again, let’s review what Feldstein said. First, he says reducing the dollar’s value benefits Americans by giving them less value for what they sell without requiring them to reduce their prices, and by requiring them to pay more value for goods and services they buy from abroad. Second, the weaker dollar stimulates economic growth. Third, do not believe public statements of the U. S. Treasury secretary because they are untrue.    
    On Feldstein’s first point, no national debate or legislative enactment has empowered the Fed’s intellectuals to determine whether Americans should receive more or less value for their goods and services. Second, the Fed argues its funds rate target is raised to slow economic growth in order to curtail inflation and make the dollar stronger, so the funds rate should not be raised in the first place if policy actually prefers a weak dollar that stimulates growth! Of course, both arguments are fallacious, as a stable dollar would eliminate inflation and allow economic growth without Fed obstruction. Third, President Bush has often stated that Americans and world leaders must know that America speaks clearly and means what it says. Is the president right, or is Feldstein? If it is the president, then the Fed and Treasury ought to speak the truth with one voice.
Growth Management Conundrum
    U. S. GDP growth was announced recently for the third quarter of 2007 as 3.9%. This figure reportedly was derived by adjusting for inflation at the rate of 0.8% annually. If actual price rises are near 7% for 2007 as has been reported according to “pre-Clinton” CPI measures, then the economy may already be in recession. Integrity and trust in economic matters, especially monetary policy, is precious and difficult to replenish if squandered. After 40 years of mismanagement by the Fed and Treasury, the dollar’s reputation is vulnerable to significant additional damage.
When Our Friends Can’t Trust Us
    America’s new friend in Europe, President Sarkozy of France, wisely warned Congress two weeks ago that U. S. actions driving down the dollar’s value threaten a trade war. Sarkozy correctly perceives currency manipulation as protectionist to the same ends as tariffs and subsidies. Russia has proposed international standards for the dollar as the reserve currency. At the same time, Iran and Venezuela urge abandonment of the dollar as the global currency accepted for oil production. The Fed has put the dollar’s blood in the water and weakness has been scented by all observers. The dollar must be restored to strength based on sound policy of value pegged to a stated gold price target, or suffer destruction at the hands of its foes. ~