Strong Dollars Good, Weak Dollars Better!

"A strong dollar is in America's national interest," says Treasury Secretary-Designate Timothy Geithner. Yes, but what exactly are we going to do about that?

Apparently something, and that something is allegedly going to be done against China. Geithner also praises his would-be new boss for having sponsored "...tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles."

But, as The Economist points out, Chinese monetary policy is currently to prop up the strength of the dollar. Which only makes sense, because if the dollar weakens further, the nearly three trillion dollars' worth of U.S. government debt owned by Chinese banks (and thus ultimately controlled by the PRC itself) will decline substantially in value. They can't afford for the dollar to become too weak.

Now, mouthing support for a strong dollar and railing against China are two things that someone in Geithner's position can do to rally political support for himself. But it's quite apparent he doesn't really mean any of it. Nor should he, necessarily. While I think strong dollars really are in the best interest of the U.S. -- we should be importing profits from other nations -- a reasonable argument can be made that weak dollars are at least in our short-term interest insofar as they encourage foreign investment in U.S. industries and thus create jobs here. Given that we are in a rescession, jobs are good no matter where they come from.

And given that China does not want to see the dollar weaken, castigating China's monetary policy suggests that indeed, Geithner really wants to weaken, not strengthen, the dollar on the world index. Which is predictable but disappointing -- it suggests that the Obama Administration is not taking a long view of things and is going to craft a monetary policy that may relieve some pain in the short run but at the end of the day will leave us exporting the profits generated by our own industries without getting a corresponding return from economic activity elsewhere in the world. In the long run, that is not a good policy for us to pursue.

Hat tip to Trade Diversion.