Is the Dollar Still Falling?

In his classic work, The General Theory, published in the depths of the 1930s Depression, John Maynard Keynes famously observed that “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

Keynes’s Depression-forged insights have been routinely reaffirmed over the subsequent 70 years of global capitalist history, not least during the current movements of decline, revival, and renewed drop in the value of the dollar in global currency markets. And as Keynes emphasized, the main issue here is not merely the behavior of financial markets, which never has been more rational or socially redeeming than Las Vegas or Monte Carlo (as was obvious during the Wall Street bubble years under Clinton). The real issue is rather how the behavior of financial markets define the limits of acceptable economic policies about things that matter well beyond the confines of the casino, like unemployment, the distribution of income, and the economic possibilities for our children.

In a piece last April in CounterPunch, I wrote that “Between January 2002 and December 2004, the dollar fell by 34 percent relative to the euro, and 22 percent relative to the Japanese yen. The prospect is for the dollar to keep declining at least through 2005.” I was accurate then in describing what the prospect had been at that moment. But in fact, between April and August, events have rendered that prospect increasingly uncertain. Between May 1 and July 1 of this year, the dollar rose by 7.7 percent against the euro and by 6.3 percent against the yen. Then, between July 4 and August 15, the dollar fell back by 3.7 percent against the euro and 2.1 percent against the yen, before rising again to roughly their July levels by October 1.

One of the main points of my April piece was to explore the factors that would work against the continued dollar decline that proceeded through 2002 ­ 2004, and would, more generally, produce a more uncertain future path for the dollar than was being widely asserted at the time. The first and most straightforward factor that I had mentioned was that U.S. policymakers themselves would not passively allow a dollar collapse. I said then that the key policy tool for the U.S. to support the dollar against the darkening opinion of global currency speculators was to raise interest rates-i.e. sweetening the interest rate returns for global bond purchasers if they keep holding their wealth in U.S. dollar bonds. Federal Reserve Chairman Alan Greenspan has done just that in the ensuing months, having pushed up the Fed’s main monetary policy rate (the federal funds rate) from 2.75 to 3.75 percent just since April, and with promises of more increases to come.

I also said that any movement among European policy makers away from the neoliberal policy agenda that has prevailed for roughly two decades would spook currency markets and push the euro down against the dollar. Neoliberalism in Europe, including low government deficits and high interest rates, have conspired to maintain unemployment in the range of 10 percent for a most of the past 20 years in most European countries.

European elites appear just as committed to neoliberalism today as they were in April. But the European people have made it clear that they’ve had enough. The most vehement expression of this sentiment came when voters in France and the Netherlands both decisively rejected the European Union constitution last May. Global currency speculators did not miss this unequivocal message from the European voters, even while European politicians expressed disgust over the people’s irresponsibility. The EU’s then President Jean-Claude Junker of Luxembourg declared that “This evening, Europe no longer inspires people to dream.”

A third change in the global currency landscape since April was something I did not discuss in the earlier piece ­ the decision last July by the Chinese to allow their currency, the yuan, to adjust slightly upward relative to the dollar. The Bush administration had been lobbying heavily for the Chinese to make this move, given that a low-valued yuan helps the Chinese to keep pushing cheap imports onto the shelves of Wal-Marts and the rest of the U.S. market. This makes the U.S. trade deficit-our purchases of imports in excess of our sales of exports-grow correspondingly. The trade deficit, in turn, along with the federal government’s $400 billion budget deficit, are the primary forces pushing the dollar onto its downward trajectory in the first place.

U.S. policymakers have long complained that the Chinese haven’t truly embraced the rules of neoliberal global capitalism, giving themselves an unfair advantage by holding down the value of the yuan. This is entirely true. For decades now, the Chinese have been ignoring neoliberal precepts in this and many other ways, through which disdain they have produced something approximating to the fastest rate of sustained economic growth in world history. One would think that this new Chinese gesture­ and to date nobody,including probably the Chinese themselves, knows whether this move amounts to more than a token nod in behalf of U.S. sensibilities ­ will immediately work to nudge the dollar back onto the downward path that prevailed between 2002 and 2004, at least at first. This is because with the dollar now being less valuable relative to the yuan, it is correspondingly also less valuable for everyone else in the world that has been using dollars to purchase imports from China. However, if a more expensive yuan does contribute to a smaller U.S. trade deficit, the net result from the smaller trade deficit could be to push the dollar back up.

Still another possibility is that, with the dollar cheapened relative to the yuan, the Chinese may then decide to stop purchasing U.S. government bonds as heavily as they have done the past few years. The purpose of U.S. bond purchases by the Chinese (along with an even more voracious customer, the Japanese) was to prevent the dollar from falling too rapidly, which would thereby render Chinese products more expensive in the U.S. market. However if the Chinese did decide to cut back on their U.S. bond purchases, this would produce serious downward pressures on the dollar against the euro and other currencies, not simply against the yuan. Alan Greenspan would then likely push U.S. interest rates still higher in self-defense. The U.S., in short, may not find themselves entirely enamored with the exchange rate policy they wished for from China.

Such uncertainly is the very stuff on which the global currency casino thrives. Is the dollar going to keep rising, as it did between April and July, or return to its downward trajectory of the previous two years? The dice keep rolling. As Lord Keynes, again, famously remarked, “on such matters, we simply do not know.”

Still, whether or not the dollar continues falling was not the main question I posed last April. My main concern was rather, would a dollar decline be good or bad news? Nothing has changed since April to undermine my basic point then, which is, there is no simple answer to that question, not least because the question inevitably itself pushes us well beyond the environs of the financial market casino. We can’t consider whether a dollar decline is good or bad news without asking, “for whom?” Wall Street? U.S. manufacturers? U.S. workers? French, Dutch or Chinese capitalists or workers? How about South African workers? The answers don’t break down easily along well-defined political lines.

Thus, under neoliberalism, U.S. workers have been badly hurt by the U.S. trade deficit and globalization more generally, since it increasingly places them in competition for jobs with workers elsewhere. U.S. workers therefore benefit from a weaker dollar, since a weak dollar makes it easier to sell U.S. products in foreign markets and harder for imports to compete with U.S.-based manufacturers. But U.S. workers would benefit far more from an anti-neoliberal commitment to full employment policies in the U.S., something akin to what the French and Dutch voters appeared to be effectively endorsing in May. A full employment program in the U.S., as well as France and the Netherlands, would also benefit workers in other countries as well, including those in poor countries. If governments in rich countries were committed to creating jobs for their residents, then differences over trade policies and exchange rates ­ the struggle to ‘beggar-thy-neighbor,’ to create more jobs at home by taking jobs away from neighboring countries­ would diminish to a second-order problem.

But as long as exchange rates and trade policy remain a first-order problem, the U.S. does face a serious and unavoidable trap, which is the legitimate source of the hand-wringing about the dollar’s decline from 2002 to 2004. Even without the help of the Japanese and Chinese purchasing U.S. government bonds at their recent heavy rates, the U.S. can probably counteract the long-term downward pressure on the dollar generated by our persistent trade and budget deficits. But the Fed will have to keep raising U.S. interest rates to accomplish this. Persistently rising interest rates will then push the U.S. toward recession, especially given that the U.S. housing market bubble is founded on this now cracking foundation of low interest rates.

The threat of recession therefore hangs heavily over the remainder of the Bush -2/Greenspan era, with the fundamental problems extending well beyond simply the ups and downs of the dollar. But this should be no surprise, given that Bush/Greenspan, just as with Clinton/Greenspan, have never wavered in behalf of a fundamentally neoliberal agenda. The real issue is therefore the one that that French and Dutch voters pushed into the faces of Europe’s elites last May: how long will neoliberalism continue to call the shots, defining the limits of acceptable economic policy?

The answer to that question, ultimately, is about politics and not economics. Neoliberalism will continue to make the material circumstances of life worse for the overwhelming majority of people throughout the world. But the Alan Greenspans of the world also know how to prevent full-blown economic meltdowns. Opponents of neoliberalism therefore can’t simply wait for Greenspan and company (including his successor, to be named soon) to slip up and allow a calamity to happen. The historical transition away from 25 years of neoliberal ascendancy will only come when the “no” to neoliberalism votes, such as in France and the Netherlands, can be transformed into positive and successful programs and movements throughout the world.

ROBERT POLLIN is professor of economic and founding co-director of the Political Economy Research Institute at the University of Massachuesetts-Amherst. His groundbreaking book, Contours of Descent: US Economic Fractures and the Landscape of Global Austerity, has just be released in paperback by Verso with a new afterward. He can be reached at:

A recent interview with Pollin can be read at the PERI site.










We published an article entitled “A Saudiless Arabia” by Wayne Madsen dated October 22, 2002 (the “Article”), on the website of the Institute for the Advancement of Journalistic Clarity, CounterPunch, (the “Website”).

Although it was not our intention, counsel for Mohammed Hussein Al Amoudi has advised us the Article suggests, or could be read as suggesting, that Mr Al Amoudi has funded, supported, or is in some way associated with, the terrorist activities of Osama bin Laden and the Al Qaeda terrorist network.

We do not have any evidence connecting Mr Al Amoudi with terrorism.

As a result of an exchange of communications with Mr Al Amoudi’s lawyers, we have removed the Article from the Website.

We are pleased to clarify the position.

August 17, 2005