So You Say You Want a Cheaper Dollar?


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In a TAP column, I write that if politicians want a cheaper dollar (and they should) there’s a better way than threatening tariffs:

The problem with the bill in Congress is that the proposed solution misses the mark. Threatening to slap high taxes on Chinese-made goods could cause the Chinese government to change its approach. By the same token, threatening to shoot a nuclear missile at Beijing could also produce such an effect. Or it might lead to a downward spiral of retaliation and recrimination that only makes things worse. At the end of the day, putting higher taxes on Chinese-made goods is only going to make things worse for American consumers and Chinese workers alike. The proposition that it will help U.S. manufacturers is based on the dubious notion that U.S.-China trade is mostly in identical goods. Realistically, the main consequences of a trade war would be Americans purchasing more stuff from countries that are similar to China (Vietnam, Bangladesh) while China buys more from Canada, Europe, and Japan.

The good news is that there’s a better way. The spectacle of the world’s only superpower puzzling over the best way to reduce the value of our own currency is slightly bizarre. To be crude about it, you make dollars less valuable by having the Federal Reserve print more dollars, not by complaining to China. In technical terms, there are a number of ways you could achieve this. One is what’s known as unsterilized foreign-exchange interventions. Another is Joe Gagnon’s idea for bond purchases. The Fed can even print money and buy people’s old socks with it. The point is that more dollars equals less valuable dollars. The result would be modest inflation in the United States — which as Paul Krugman explains would be a good thing on its own terms. Then the only way for China to prop up the dollar would be to create ruinous inflation in its own country, which there would be no good reason to do. Problem solved.

I didn’t get into this in the column, but even though the bill that passed the House yesterday would make a bad law I think it’s arguably a good thing that it passed just in terms of the signal it sends to the Chinese. But it’s still bizarre that we’re running around talking about coercing China into allowing the dollar to devalue. This is still the world’s only superpower and there’s nothing stopping us from doing it unilaterally. Instead of hectoring the People’s Bank of China, Congress should hector the Fed.