Thursday, May 22, 2008

Strengthening the Dollar

To Larry Kudlow (
Your discussion this evening with five Wall Street economists -- Gary Shilling, Fritz Meyer, Invesco Aim; David Malpass, Bear Stearns; Joseph Battipaglia, Stifel Nicolaus; and Jim Awad, WP Stewart Asset Mgmt – about the need for a strong dollar, about the declining value of the dollar being largely responsible for the sky-rocketing prices of oil and other commodities, left one thing out – the cause of the decline in the value of the dollar. You seem to think that the world’s central banks can do something about strengthening the dollar. Wrong, as my co-authors and I demonstrate in a recently published book, Trading Away Our Future (Pittsburgh, Ideal Taxes Association). The cause of the falling dollar is the trade deficits which amounted to about 5-6 percent of GDP the last several years, about $710 billion in 2007, $760 billion the year before, with no real decline in sight. Foreign countries accumulated U.S. financial assets and kept the dollar’s value high for several years but increasingly began investing their dollars in Euro assets, raising the Euro’s value as previously they did for the dollar. But the book speaks for itself.

My qualifications, Professor Emeritus of Public and International Affairs, the University of Pittsburgh; Ph.D. in Economics from the University of Chicago. Milton Friedman was Chairman of my dissertation committee.

The trade deficit is a secret. Free traders ignore it or think it is wonderful that trade with China, Japan, and the oil-producing countries has been burgeoning. Larry, I’m a free trader but trade has to be balanced. Failure to balance trade has cost us millions of manufacturing jobs, caused wage stagnation, worsened the distribution of income and is the cause of the stagnating U.S. economy.

It should be no secret that the chronic trade deficits of the United States are a basic cause of the current miserable performance of the US economy. Why then have successive Councils of Economic Advisors, the Commerce and Treasury secretaries, the governors of the Federal Reserve System, Congressional leaders, and nearly all of the economists in academia kept silent while our trade deficits grew astronomically over the past three decades

The principal reason for their silence is that they are politically addicted to an ideology of free trade and do not want to appear to be espousing barriers to trade. A very recent illustration was an op-ed in the WSJ in which a distinguished economist, Prof. Ronald McKinnon ( “The Dollar and the Credit Crunch”, WSJ 3-31-08) discusses the sources of the enormous accumulation of dollar reserves, mentioning specifically China and the Gulf oil-producing states, without once mentioning the trade deficits. Of course not, they are a secret! $700 billion; it’s just money!

Or a couple of days ago, economist Fred Bergsten in the WSJ 5-20-08 denounced “The Democrat’s Dangerous Trade Games” as protectionism, likewise failing to mention the trade deficits. Actually I have no fear of a free trade area encompassing Colombia, Panama, etc. with NAFTA. They are no threat to our well-being. But getting trade into balance with China and OPEC is not protectionism; it is anti-mercantilism. It is pro free and balanced trade. Please read the book.

Call me at 412-682-1286 and I’ll send you a copy or go to the web site and order one for the grand sum of $12.95.

Yours truly,

Raymond L. Richman

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