Money in no way alters reality. This truth seemingly eludes Harvard economist Jason Furman.
Consider his assertion in the New York Times that the dollar at “multiyear lows” ultimately “could be good for the U.S. economy.” Really? How? Furman is making an argument equivalent to one suggesting a six-inch-foot would magically make us tall.
Money is a measure. Nothing else. The measure is meant to report reality. Cutting the measure in half doesn’t alter the length, weight, speed or cost of anything, it just means that perception of length, weight, speed, and cost will adjust to the new measure.
Furman writes that “A strong dollar benefits consumers by allowing a given amount of U.S. currency to be converted into more foreign currency.” Translated, they can buy more. But if the dollar rises as foreign currencies are falling, logic dictates that foreign prices will adjust to reflect the weaker currency. All that, plus foreigners export to us with an eye on importing what we produce, no? If so, as in if the dollar is soaring against its foreign counterparts, the same logic Furman uses to explain greater buying power for Americans reflects reduced buying power for our foreign trading partners.
About the alleged merits of a weak dollar, Furman writes that it’s good for American exporters because “When the dollar falls, it becomes easier for foreign buyers to afford American airplanes, cars, bicycles or beers, boosting demand and encouraging U.S. companies to hire more workers to meet it.” Ok, but in his discussion of the supposed genius of a rising dollar, Furman told readers that it makes it possible for U.S. producers to “spend less to buy imported products or materials.” From this we can conclude that a weak dollar wouldn’t benefit U.S. exporters exactly because in a paraphrase of the trained economist, U.S. producers will have to spend more to buy imported products or materials to produce what they aim to export.
Money is a veil. Changes in its exchange value don’t alter the real price of anything.
If anything, floating money unnaturally keeps prices high and for obvious reasons. When the value of money is uncertain, investment is rendered less certain. Lest readers forget, when investors put money to work they’re buying future returns or income streams denominated in the money invested.
Think about the above truth with President Trump’s embrace of a weak dollar top of mind. He thinks it’s great, but a falling dollar compromises investment returns. By extension, it reduces the incentive to invest.
If there’s reduced investment, there’s reduced discovery of enhanced production techniques that result in a great deal more production of market goods at falling prices. A falling dollar doesn’t make U.S. producers more competitive precisely because a falling dollar makes the investment that powers competitive advance scarcer.
Furman throws in a few more mythical notions in his latest Times piece about how “exchange rates are driven by fundamentals like budget deficits, capital flows and central banks’ interest rates” (actually, they’re not), but the main thing is that he’s promoting a fictional narrative that won’t die suggesting that changes in the measure (money) alter the commercial reality. No, that’s just not true.
Money’s sole purpose is to facilitate the exchange of market goods, services, and labor. It’s a reminder that the concept of money eludes not just Trump, but Furman himself. Ideal money is constant in the way that the foot, cup, and minute are constant. Don’t hold your breath waiting for commentary like that from Furman, or from the president he critiques.
Originally published on Real Clear Markets.
