Prosperity Requires a Stable Dollar
By trying to do too much, the Fed has given us a volatile currency. I’d change that as president.
By Vivek Ramaswamy
May 1, 2023 6:09 pm ET
With a recession looming, and on the heels of recent regional bank failures, the Federal Open Market Committee meets this week. The standard account for the collapse of Silicon Valley Bank, Signature Bank and now First Republic is that the Federal Reserve held interest rates too low for too long, only to hike rates too high too quickly. The deeper problem, however, is how the Fed has tried to achieve its mandate.
Attempting to balance low inflation and full unemployment—trying to hit two targets with one arrow—has proved to be disastrous since the Phillips Curve cult gained prominence at the Fed around 2000. If elected president, I will return the Fed to a narrower scope: preserving the U.S. dollar as a stable financial unit to help prevent financial crises and restore robust economic growth.
Beginning in the 1980s and lasting through most of the 1990s, the Fed governors, including Vice Chairman Manley Johnson and Wayne Angell, used a framework first adopted by Paul Volcker in 1982 to stabilize the dollar. The idea was to consider the dollar’s value in terms of commodities, letting it serve as a reference point for other nations’ floating fiat currencies. This provided financial stability for two decades following the stagflation of the 1970s.
Beginning in the late 1990s, the Fed’s scope drifted to include “smoothing out” business cycles. This was a mistake, since business cycles serve a healthy function by transferring the assets and employees of poorly run companies to more capable management. Even worse, the Fed’s actions often exacerbated business cycles by creating transitions that create boom-bust-bailout cycles instead. The Fed now typically tightens when an economic slowdown is impending, engineering a downturn of liquidity that catalyzes a profit downturn, leading to a credit-cycle downturn in which credit events—bankruptcies, credit spreads and financial-institution failures—prompt cries for bailouts. This was the pattern in 2000, 2008 and—so far—2023.
In 2000 the Fed issued six consecutive rate hikes from June 1999 to March 2000. Meantime, the dollar’s real value was rising, indicating deflationary pressure, suggesting no good reason to tighten. A review of Fed transcripts from 1997 through 2000 revealed a major shift from prioritizing a stable dollar to becoming captive to academic fears that further wage gains might cause inflation.
In the aftermath of this self-inflicted recession, the Fed overreacted by pushing the federal-funds rate to a then-record low of 1%, holding it there even as the economy rebounded well into the next business cycle. The dollar’s real value fell below the well-established 20-year range that the previous Fed regime had worked so hard to achieve, which should have told the Fed that emergency liquidity was no longer needed. By ignoring this major inflationary signal, the Fed planted the seeds for the next crisis, which arrived in 2008.
From 2000 to 2007, the Case Shiller National Home Price Index rose 73%, reflecting a boom in real estate. But in real-dollar terms, dollars in terms of commodities, housing prices were up only 1.7%. The weak dollar transmitted false price signals that resulted in the misallocation of capital.
A crucial benefit of a stable dollar is that it maintains the balance between debtors and creditors. A sudden change in that balance is the essence of a financial crisis. In 2008, trailing inflation, caused by the dollar’s multiyear weakness, met new deflationary forces as the dollar soared 36% in three months. This shifted the balance abruptly, culminating in the failure of Lehman Brothers and other major investment banks. Quantitative easing was announced the next month, ostensibly to provide liquidity, but its only chance of working depended on following the approach Mr. Johnson used in 1987. Instead, the Fed rolled out four rounds of quantitative easing, all of which would have been unnecessary had the Fed not ventured away from dollar stability.
These actions paved the way for the asset bubble of 2023. The Fed had missed key dollar signals again in 2021. In February 2021, with the consumer-price index still below but approaching the Fed’s 2% target, the dollar’s real value returned to its three-year stretch of pre-Covid relative calm. This was a sign to halt and even reverse asset purchases, normalize rates, and stabilize the dollar. Instead, the Fed bought an additional $2 trillion of assets, which provided fuel for speculative securities and allowed CPI to race to a peak of 9.1%. The Fed waited for late-cycle labor-market indicators, including wage growth, then tightened into an already slowing economy, extending the familiar pattern.
The global market will hang on every word of every FOMC press conference to see what a dozen central planners have to say. That won’t be because these planners have any special insight. Everyone will listen to see what the Fed may destabilize next.
Chairman Ben Bernanke claimed that achieving a target rate for CPI or PCE (personal consumption expenditure) inflation will stabilize the dollar relative to consumer goods and services. This assumes that consumption drives the economy, when production is what really does. And production is best facilitated when the dollar is stable in real time, not when a lagging index of sampled consumer prices says it is.
During the only stable dollar eras of the last century, annual GDP growth averaged 4.9% in 1922-29, 4% in 1948-71, and 3.7% in 1983-2000. The volatile dollar from 2000 to 2022 saw average growth of a paltry 1.9%. Had the dollar remained stable since 2000, with an enduring 3.7% growth, the economy would be nearly 50% greater than it is today, and we would have avoided multiple financial crises along the way.
The Fed should refocus to avoid repeating its past mistakes, and I intend to make the 2024 presidential race in part a referendum on the proper role of our central bank.
Mr. Ramaswamy is a candidate for the 2024 Republican presidential nomination.
