You may have heard that the U.S. dollar is quite strong again. That sounds good, right? "Strong" is generally a positive adjective, after all.
Well, not so fast. Because if the dollar is strong, something else must be weak. So whether a "strong" dollar is a good thing or not depends on some context.
A "strong" versus "weak" dollar is all about how much the dollar is worth compared to other currencies, as measured on international currency exchange markets. If someone on those exchanges was willing to give you two Canadian dollars for every one U.S. dollar you had, then the U.S. dollar would be considered quite "strong" compared to the Canadian dollar. Now in reality, the highest the exchange rate has ever gotten is about 1.1 Canadian dollars for every U.S. dollar, and the lowest it's gotten is 0.6 Canadian dollars for every U.S. dollar. So generally, when people say the U.S. dollar is "strong" compared to the Canadian dollar, they're speaking in historical context: They mean the U.S. dollar is approaching that 1.1 ceiling.
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We don't just compare the U.S. dollar to Canada, of course. We stack it up next to a bundle of six major international currencies. And the last time the dollar was this strong against those half dozen currencies was way back in 2003.
So why is the dollar doing so well?
The main reason is the U.S. economy is doing better — not necessarily better compared to its own historical performance, but better compared to everyone else these days. And when the economy is doing (at least relatively) well, that makes it an attractive investment opportunity: Putting money into U.S. ventures and business is more likely to earn you a better return. But to invest in the U.S. economy you need U.S. dollars. So demand for U.S. dollars goes up relative to other currencies, and the U.S. dollar gets stronger.
But there's another wrinkle that suggests a strong dollar may be bad.
A strong U.S. dollar means Americans can buy more stuff from other countries. That stuff is denominated in other currencies, and you can get more of those currencies for every U.S. dollar. So America's imports go up. The flipside of that same development is it becomes more expensive for people in other countries using other currencies to buy American-made stuff denominated in U.S. dollars. So America's exports drop.
Rising imports and falling exports equals a bigger trade deficit. So, all other things being equal, as the U.S. dollar gets stronger, America's trade deficit with the rest of the world will grow. That can be a bad thing. But it doesn't have to be bad.
When the trade deficit grows, Americans are getting more goods for cheaper from abroad, which on net will raise living standards. But a bigger trade deficit also makes it harder to generate jobs for Americans: Our demand for goods and services is going to employ people in other countries rather than to employ people here at home. Furthermore, falling exports tend to hit sectors that employ the working class, like manufacturing, especially hard. At the same time, the benefits of a stronger U.S. dollar — being able to travel and buy stuff abroad — tend to accrue to richer Americans and businesses. So a stronger dollar and the resulting bigger trade deficits tend to exacerbate inequality.
But a trade deficit doesn't have to produce these results. The federal government could offset the drag on demand by running a bigger budget deficit — by spending more than it taxes, the government pumps U.S. dollars into the American economy even as the trade deficit drains them out. By employing Americans, buying stuff from U.S. businesses, and allowing poorer Americans to consume more by giving them cash aid, the government can replace lost jobs and counteract rising inequality.
So if you dislike government deficits, you should also advocate closing the trade deficit. Conversely, if you think America should tolerate higher trade deficits for the sake of the rest of the world, you should also advocate bigger deficit spending by the U.S. government.
That last point actually goes double for the current situation, in which the U.S. dollar is strong, not so much because America is doing great, but because everyone else is doing so badly. It isn't just Americans relying on the U.S. economy to provide the demand to employ them. A lot of the rest of the world is relying on it to employ them, too. That reliance is making the U.S. dollar stronger, which is driving up the U.S. trade deficit, which is making it harder for Americans themselves to get jobs. The way to balance this all out, and help Americans while also helping the world, is for the U.S. government to realize that, like everything else in the economy, whether budget deficits are "good" or "bad" depends entirely on context. And in this context, big government budget deficits look like a pretty good idea.
