The view from PIMCO: The dollar keeps falling, and that's a good thing
Well, put PIMCO Managing Director Scott Mather in the contrarian camp. Mather says additional dollar weakening for the already beaten-down buck, which he called "inevitable," will not only benefit the U.S. but will also help rebalance the global economy. The dollar has weakened about 5% versus the euro and 10% versus the British pound so far in 2009.
"What is often overlooked is that an orderly U.S. dollar decline may in fact be desirable," Mather writes in a commentary on PIMCO's website. Further, a weaker dollar isn't tantamount with a loss of reserve currency status or with the appearance of hyperinflation: "To the contrary, a weaker dollar can go a long way toward facilitating a much-needed rebalancing of the U.S. and world economy."
The Era of Debt-Financed Consumption Is Over
The chief problem, which free markets are now in the process of correcting, Mather argues, is that the U.S. (government and consumers) spent and consumed too much (particularly exports), and produced and saved too little. And the world isn't consuming enough. Those U.S. "twin deficits" -- the budget and trade gaps -- are the primary reasons the dollar has weakened and will continue to fall.
Simultaneously, the borrowing associated with the twin deficits -- "a multi-decade-long spending binge" as Mather calls it, was also one of the causes of the financial crisis because ever-increasing debt levels cannot be sustained indefinitely. Note: Mather was careful to add that some forms of debt -- temporary indebtedness -- are good for economic reasons.
But the U.S. didn't add good debt: It added bad debt-- borrowing for consumer goods and to create "excess housing stock -- a poor investment indeed," Mather says. Further, Mather adds that nothing has fundamentally changed from a debt standpoint as a result of the U.S. government's bank bailout and fiscal stimulus: The bulk of borrowing has been shifted to the public sector from the private sector.
However, as a result of U.S. overconsumption and government borrowing, the world is now flush with dollars, which has reduced the value of each dollar, leading to the current weak greenback trend. The U.S. Federal Reserve's zero interest rate policy to help jump-start the U.S. economy, and some institutional investor reduction of dollar-denominated assets, have also played a role in the dollar's drop.
A Slowly Weakening Dollar Benefits the U.S. Economy
Still, Mather underscores that investors shouldn't fear a slow decline in the dollar: As long as it's an orderly slide, it will help the U.S. move away from an economy based on debt and consumption and toward one based on production and saving. "A weaker dollar is one of the least painful ways to both stimulate the U.S. economy and rebalance the global economy," he says.
The weaker dollar's impact on U.S. inflation? It should be small, Mather says. Further, regarding the dollar's reserve currency status, a weaker greenback isn't likely to undermine the dollar's role as the world's reserve currency in the near term for several reasons (no alternatives, dollar liquidity and political/legal factors), he adds.
Mather isn't subtle. He thinks an incremental, orderly decline in the U.S. dollar, moving forward, is inevitable and will stimulate U.S. export sales, increase domestic job creation and boost U.S. GDP. That's in addition to helping end the global imbalances that helped trigger the financial crisis and recession.
What Do You Mean by "Strong"?
Further, a strong dollar, at this time, isn't in the interest of U.S., Mather says. Also, the type of strong dollar matters. If by "strong dollar" one means an emotional plea for large tax cuts to create a deficit ahead of increased government spending and a return to credit card and home equity-financed consumption binges -- that's a strong dollar few economists would want. The latter imbalances represented unsustainable GDP growth and helped bring about the global financial crisis and the long U.S. economic downturn.
However, if by "strong dollar" one means a balanced budget, more saving and producing than consuming, and large export sales, that is in the nation's interest because it means balanced, sustainable GDP growth.
The alternative argument to the weaker-dollar-is-a-good-thing view? Perhaps the U.S. economy can achieve Chinese-style growth -- GDP growth approaching 10% per year (not likely). Or maybe some breakthrough technology dramatically reduces the cost of living/business costs -- for example, a new, cheap, plentiful energy form (possible, but not on the horizon).
Old-Fashioned Path to Growth
Such scenarios would mean corporate revenue, earnings, and U.S. income and wealth would increase to such a degree that they could counteract fundamentals pushing the dollar lower. Then the U.S. could grow its way out its budget deficit, and the trade deficit wouldn't matter because U.S. income and wealth would be considerably higher.
But absent the appearance of Chinese-style growth or an epoch-changing breakthrough, the dollar will continue to trend lower, global imbalances will continue to correct, and the U.S. economy will return to balanced, sustainable growth the old-fashioned way:through increased investment, saving and production (including exports); less consumption; and higher taxes and less government spending to eliminate the budget deficit.