Rubin Criticizes Weak Dollar Policy

Robert Rubin spoke out against policies that weaken dollar, from the commonsense perspective that a cheap dollar lowers the US standard of living. That’s a bit simplistic, since the impact of a weak currency on citizens depends on how dependent a country is on imports, and critically, to what degree domestic goods could substitute for imports. However, he is right to point out that trashing the dollar isn’t the best fix for our economic woes.

A Bloomberg story yesterday provides another indicator of the dollar’s diminished status:

Bargaining while buying some trinkets in the Maldivian capital, Male, recently, I heard most unexpected words: “You can keep your dollars.”

This tiny nation of 1,200 islands has long accepted U.S. currency out of convenience for visitors and financial sobriety. The dollar tended to do better in global markets than the local monetary unit, the rufiyaa. That may be changing and it’s a bad omen for the world’s reserve currency.

“My dollars aren’t as popular here as they’ve been in the past,” says Moyez Mahfouz, 51, who has visited the Maldives from Bahrain with his family once or twice a year for a decade. “More and more on this trip, I’m being asked for rufiyaa.”

From Bloomberg:

Former Treasury Secretary Robert Rubin said relying on a falling currency to stoke exports isn’t a “sound approach” and urged economic policy changes that would strengthen the dollar.

“The lower the exchange rate, the less that we receive in exchange for what we produce, and that lowers our standard of living,” Rubin said in an interview after attending a conference in Washington. “Our objective ought to be to have a strong currency based on sound policy.”

Policy makers aren’t pursuing solutions to the country’s economic deficiencies and looming budget deficits, said Rubin, who served under Bill Clinton, a Democrat. By contrast, Treasury Secretary Henry Paulson and other Republicans have lauded the U.S. economy as “healthy” and hailed demand for American exports as a boon for growth.

Policies should be focused on curbing government spending, raising revenue and addressing the soaring cost of government programs such as Social Security and Medicare, said Rubin, now chairman of Citigroup Inc.’s executive committee. Improving education, research and infrastructure are critical to increase productivity, he said.

“You put it all together and I think we can do very well economically and then we can have a strong currency,” said Rubin, who served as the chief economic adviser to President Bill Clinton. “We’re certainly not on those policy tracks right now.”

The dollar traded at $1.4438 per euro at 3:24 p.m. in New York, after dropping as low as $1.4438 yesterday, the weakest since the European currency’s debut in January 1999.

The slide “seems to have helped with respect to exports,” Rubin said. At the same time, “a much weaker dollar” could have “inflationary effects,” he said, while declining to predict the U.S. currency’s direction.

The dollar has declined in four of the past five years, and is down 7.5 percent so far in 2007 against a broad index of world currencies. During Rubin’s tenure at the Treasury from 1995 to 1999, the same index increased 24 percent.

Record exports helped trade contribute 1.3 percentage points to economic growth in the second quarter, outweighing the impact of the decline in home construction.

Treasury Secretary Henry Paulson earlier today reiterated his support for a “strong” U.S. currency during a trip in India. “I am strongly committed to a strong dollar,” he said.