In some ways, President Obama’s leaked contempt for the “strong dollar” is well-deserved if only due to the mistakes about the semantics of it. Maybe I am being overly pedantic in decrying this taxonomy, but since we live in an economic age of high and burdensome redefinition this is more than just a debate for academic affairs to me. The increasing “value” of the dollar versus other currencies is just as undesirable as the inverse experienced in the last decade. The latter denoted nothing more than the rise of the eurodollar standard while the current condition more than suggests its continued fall; neither of those are particularly worthwhile outcomes.

Apparently, the President’s remarks were made in private and then leaked to the press via the French (why is that the French always play an antagonistic role in the affairs of the dollar, and now the “dollar”?).

A senior U.S. official denied on Monday a news wire report that President Barack Obama had told a Group of Seven industrial nations’ summit that the strong dollar was a problem.

 

Bloomberg News earlier quoted a French official as saying Obama had made the comment.

 

“The President did not state that the strong dollar was a problem,” the U.S. official said.

We seem to be unable to comprehend the manner in which the strong dollar truly applied, as it was an instrument of stable and robust growth; and as much a healthy, well-balanced financial system it should be pointed out. The dollar being nothing but a derivative, currency properly defined, the strong dollar meant that convertibility was nothing out of the ordinary. During periods of financial stress, like 1929 and immediately thereafter, convertibility was all that mattered. The proffered answer to that “weak dollar” was to end the dollar.

What was formed in 1944 at Bretton Woods was only somewhat recognizable as the dollar, including, somehow, continuing the pound in a parallel reserve currency condition. For both UK and US monetarism and the growing desire to exercise “optimal control”, the reserve currency role was an apparent impediment. In what has been called Triffin’s Paradox was nothing of the sort, as Robert Triffin wondered how the dollar could maintain gold convertibility under Bretton Woods while at the same time operating an expansionist monetary policy (which the UK had already undertaken, to several pound crises during the period, especially the very damaging 1967 episode that sounded the end of sound money as too restrictive for what monetary economists wish to manipulate).

After Solow and Samuelson argued in favor of an “exploitable” Phillips Curve, the Fed decided to embrace the theory of “buying” employment with inflation. The gold exchange standard was supposed to get in the way of that, since that was what convertibility actually meant, meaning there really was no paradox for Triffin to solve. Events proved that correct, as the whole effort of “buying” employment with inflation gained very little employment and a whole lot of inflation. It also ended what little was left of the dollar once the Bank of France started asking for US gold in convertibility of its dollar reserves.

Milton Friedman, who played an outsized role in demonstrating the futility of Solow and Samuelson, also (paradoxically?) advocated for floating currencies and greater central bank flexibility. But even he recognized the limitations that were necessary to maintaining healthy balance. What he advocated was not total authoritarianism on all sides of a floating regime, but rather a hybrid system where even a fully “flexible” internal central bank would be checked by external market forces.

Friedman advocated for either a fixed exchange with discretionary internal monetary policy (as the former would reign back the latter) or the reverse (a fixed internal monetary policy with a floating currency). In his mind, and I think academically this made a lot of sense, there had to be a market mechanism to act as a release against the buildup of unsustainable pressures.

The eurodollar standard obliterated all of that, ending certainly Triffin’s Paradox because the Fed got total freedom over internal monetary mechanics while the global liquidity system converted from actual money to a credit-based exchange system. While that last part sounds like a market mechanism, and even started out in that manner, it has been overwhelmed by volume and moral hazard. Initially there was some hope that the vestiges of Friedman’s outline would remain and offer at least some self-limitation, but that ended around 1995 when eurodollars transformed from the replacement of the Bretton Woods gold standard into a purely speculative vehicle for global asset bubbles.

The pivot of that transformation was the introduction of interest rate targeting and the early 1990’s acceptance of eurodollars as on par with federal funds. Thus, a conduit was opened by which not only would the two systems essentially merge (though not permanently seamless, as we found out in August 2007) but also that eurodollar liquidity could then support not just global trade but global bank balance sheet expansion for whatever reason – especially and including asset bubbles.

That meant the “falling dollar” of the 2000’s was just as undesirable as the “rising dollar” or “strong dollar” is now, and for much the same reason in the end – instability, which is the very opposite of the strong dollar. If there is a drag on the US economy from the “dollar” over the last year or so, it really isn’t export competitiveness or corporate earnings, it is the fact that the eurodollar system and the global economy are so inseparable. When economists decades ago accepted Triffin’s Paradox as a means to express the problems they were facing in exerting greater central planning, they were essentially trying to describe how international finance and international economics could so durably fuse. And it has, to such a magnificent mess.

The economic clutter has been, ironically, nothing more than market forces trying to intrude in all this central bank “flexibility.” Therefore it should be recognized that central banks have not really been fighting for a recovery but rather struggling to push back markets in favor of their continued control.  As I put it this morning, “The eurodollar economy is falling apart and no amount of orthodoxy can reverse it because the eurodollar economy is orthodoxy.” I doubt the President is aware, but his purported dissatisfaction is not really with strong anything, rather it is in how orthodox economics got exactly what it wanted all along.