Memo To The Fed And The Treasury Department: It's The Dollar, Stupid

Forbes

18-07-2025

The USD Coin logo displayed on a smartphone in Suqian, China, on March 13, 2025. (Photo Illustration by Costfoto/NurPhoto via Getty Images) NurPhoto via Getty Images
When successfully directing Bill Clinton's 1992 presidential run, Democratic strategist James Carville coined a phrase that became the campaign's de facto slogan: 'It's the economy, stupid.' The uncertain state of the economy was the #1 issue for voters.
The state of the dollar should be the Federal Reserve's #1 concern. Similarly, the Treasury Department and the White House should cease any talk of weakening the dollar as a means of improving our trade balance. Experience demonstrates that a weak dollar begets inflation and big economic trouble. Strong nations don't have weak currencies.
It is indeed telling—and a warning of future problems—that U.S. short-term interest rates are higher than those of the EU, Britain and Japan, yet the dollar has been feeble against the euro, the pound and the yen.
The very definition of inflation is lowering the value of a currency, usually by creating too much of it. In this case, the dollar is wobbling because markets lack faith in it, even though the U.S. economy is doing better than most others. This weakness fuels chatter by the so-called BRICS—Brazil, Russia, India, China, South Africa as well as five new members—of finding an alternative to the greenback for international trade.
If the dollar is not shored up, expect stablecoins to grow and evolve into monetary alternatives. In other words, the U.S. monopoly on money will face high-tech challenges. People won't stand still if inflation ruins the dollar.
Former World Bank President and Treasury official David Malpass puts the dollar issue succinctly: A stable dollar means stable prices. Malpass would make a splendid replacement for Fed head Jerome Powell.
Unfortunately, the Fed believes economic growth causes inflation. The institution has a strong bias against a vigorously expanding economy. This is the fundamental issue with our central bank. It's oblivious to the basic importance of a stable dollar—as are all too many economists.
Money measures value like a scale measures weight, a clock measures time and a ruler measures length. It isn't a commodity like wheat or gold. It's not similar to a stock that goes up or down, depending on how well an economy is doing. When exchange rates were fixed, before we went off the gold standard in the early 1970s, the Free World flourished as never before.
Floating, unstable exchange rates distort trade patterns and lead to brainpower being diverted from productive uses to trying to profit from opportunities offered by financial instability. The daily volume of currency exchange trading now exceeds $7 trillion.
Noted economist and monetary expert Judy Shelton observes in her book Good as Gold: How to Unleash the Power of Sound Money , that profits are found in being nimble at arbitraging fleeting opportunities in unsettled financial markets. What a waste of people's talents.
President Trump is right that Fed boss Jerome Powell is playing politics regarding interest rates. But as the president nears a showdown with Powell, he and his team should emphasize the fundamental point that the fight isn't just about the current levels of interest rates but, more important, it's about a stable and respected dollar.