A Dollar Warning
President Bush has let everyone know he intends to pursue an ambitious second-term agenda. But if he wants to know what could spoil his plans even before his second Inaugural, he might consider the market reaction to his Administration's weak dollar complacency.</br></br>Stocks and bonds both tanked on Friday, as the dollar fell again and oil and gold jumped, the latter to its highest level ($449 an ounce yesterday) since 1987. Investors may recall that was the last time we had a dollar crisis, as well as a little stock-market episode known as Black Monday. The markets rallied yesterday, as the dollar firmed and oil dropped. But we hope the point has been driven home that investors don't bet on countries that debase their currencies.</br></br>All the more so when the nation's leading policy makers seem blase, not to say clueless, about the matter. Treasury Secretary John Snow has been roaming the world saying that he favors a "strong dollar" policy even as he lobbies for a weaker dollar against Asian currencies. Investors who observe what Mr. Snow does tend to discount what he says.</br></br>Mr. Snow is also fond of repeating the nonsense that exchange rates should be set by "market" forces. However, a currency isn't just another commodity, like wheat or copper; it is a store of value. And unlike other commodities, its supply is determined by a central bank, in the U.S. by the Federal Reserve, which has a monopoly on dollar creation. The global currency markets are dominated by a cartel of central banks, and currency values are a function of their relative monetary policies. Isn't a Treasury Secretary supposed to know that?</br></br>The larger worry is that the Bush Treasury, and perhaps Mr. Bush himself, seem to have fallen for the notion that a country can devalue its way to prosperity. This is the patent medicine of the manufacturers' lobby, as well as the kind of economist who has done so much for Argentina, Mexico and other nations over the years. Britain tried this in the 1970s, and had to call in Margaret Thatcher to save the country from sinking to Third World status. The Carter Administration also tried talking down the dollar and ended up inspiring a global run on U.S. assets.