Fixing the Bloated Dollar

February 14, 2017

By Jeff Ferry, CPA Research Director

The fear is growing that a rising dollar could sabotage any effort by the Trump Administration to improve the U.S. trade balance as a means of improving the health of our manufacturing industry.

Commentators have suggested that the prospect of rising interest rates and higher U.S. economic growth, combined with any moves to boost net exports, could quickly lead to a rising dollar, throwing improvements in the trade balance into reverse. But there are bold, new solutions to get the overvalued dollar under control, including a plan to charge foreigners a fee to hold dollars, known as a MAC, that the government should consider.

The U.S. needs to address what could be called “macho dollar syndrome,” the belief that a strong dollar is somehow good for the U.S. economy. In reality, a strong dollar makes our exports more expensive, our imports cheaper, thus leading to a larger trade deficit, slower economic growth, and fewer jobs. That dynamic has been taught in introductory economics classes for years. You can see the living proof simply by looking at Britain’s economic performance in the second half of last year. In June, the Brits voted to leave the European Union. The pound sterling promptly fell 15% as speculators worried about turmoil and trade agreements. The fall in sterling boosted British exports (up 18% year-on-year), leading to a significant uptick in economic growth in the fourth quarter, enabling Britain to finish 2016 with annual growth of 2.0%, the highest growth rate among the G-7 group of large countries.

Recently, some have shown renewed enthusiasm for labeling some of our most mercantilist trading partners currency manipulators. Senate Minority Leader Charles Schumer (D-NY) urged the president to put the label on China. The “currency manipulator” label, under current law, triggers dialogue with the offending country which could lead to further action at the discretion of the president.  The problem with this approach is that persistent Chinese currency manipulation has ebbed recently. According to an October report from the U.S. Treasury, China actually spent $566 billion pushing its currency up not down. 

For an economist, “currency manipulation” is better understood not as direct intervention in exchange rates, but as policies that prevent a nation’s trade balance from balancing over a full economic cycle (typically 5-7 years).  According to economist Brad Setser, East Asian countries are managing today their economies to save as much as 40% of their GDP, contributing to their trade surpluses and our trade deficits.  Last October, Setser wrote: “The problem of the global savings glut is now more acute than in 2005…The social costs—and therefore also political costs—of relying on the United States and a few other countries as consumers of last resort are increasingly evident.”

A novel idea to address dollar overvaluation was advanced by Joe Gagnon and Gary Hufbauer of Washington’s Peterson Institute in a 2011 article, Taxing China’s Assets. The core of the proposal was a 30% withholding tax on the interest paid on the holdings of U.S. financial assets by entities based in nations the U.S. deemed persistent surplus nations. The benefits of the proposal are that it would exert downward pressure on the dollar (and upward pressure on the renminbi), and it would make it plain to the Chinese and other surplus nations that they are not doing the U.S. a favor by buying our Treasury bonds. On the contrary, they are enabling their economies to grow at our expense, and we would much prefer they increase domestic consumption rather than rely upon U.S. consumers for growth. 

The biggest problem with the Gagnon-Hufbauer withholding tax is that it raises an enforcement challenge because it creates incentives for foreign investors to disguise their country of origin. For that reason Joe Gagnon himself is intrigued by another, even more radical proposal, called the Market Access Charge or MAC.  The MAC is the brainchild of economist John Hansen, now retired after a career at the World Bank. Hansen’s vision is for a charge, starting at 50 basis points (half of 1%) on inflows of foreign capital into U.S. financial assets. The one-time charge upon entry would be levied not on the interest but on the principal invested into U.S. assets. There would be no political debate required over which nations pay the MAC. They all would. The revenue flowing to the Treasury would be counted in billions of dollars.

The advantages of the MAC are that it is relatively easy to administer and it is highly likely to drive down the dollar. Most important, it demonstrates to the world that the U.S. is serious about making sure that its currency serves the needs of its domestic economy instead of the other way around. 

currency Currency Misalignment

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  • James Crawford
    The difference between establishing a consensus and building a coalition in a nutshell.

    Common ground is a lot easier to come by than a shared world view. If you want the latter you are on your own. If anybody would like some help building coalitions, give me a call.
  • Edwin Lee
    I’ve read enough of the MAC paper by John Hansen to see it as a good starting point for discussing and correcting our chronic trade deficits. However, he based his MAC solution on a combination of evidence-based assumptions and erroneous conventional wisdom. For one thing, he claims (para 3) that our deficits and manufacturing decline “are the result of the serious overvaluation of the US Dollar.” That is a manageable factor, but not the cause. I assert that the causes include: the friction-less flow of products (Free Trade), money (the US $ as global currency), cost-free and riskless (?) US gov’t borrowing, manufacturing jobs, and information (exacerbated by a border-less global internet). On the other hand, we are overreacting to the flow of people into our nation and overdoing the direct friction to stop it. Friction is a crucial element for maintaining coherence and regulating any dynamic system. Try driving a car on ice or without braking.
    MAC does produce an element of friction for inflows of capital. However, it does nothing to address the outflows. When people or nations decide to move money out of any country or any bank in a panic, that system fails. We’ve seen it happen in Asia. It is an imminent threat to the US Economy. Furthermore, it is a single source of friction which makes it relatively easy to game. Sustainable solutions require multiple, overlapping sources of friction.
    I suggest that all attempts to find a simple solution, such as MAC have an underlying assumption that stability and optimum growth are desirable and can be managed rationally over the long haul. As I see it, this assumption is bogus and nowhere supported by evidence in living systems. They rampantly overproduce, ruthlessly prune and relentlessly recycle to produce robust systems without net growth. Those processes are at work in all adult humans, for which growth merely means getting fat and less fit.
    The biosphere, our host environment upon which we utterly depend, is a multi-billion year example of dynamic stability, growth, and resilience which comes from diversity and redundancy, not from hierarchical management. It is diverse and redundant in outcomes, processes, feedback loops, scales, concentrations, etc. which produce homeostatic balances of dynamic processes which can recover from severe perturbations. A sustainable global society needs diverse and redundant economies, politics, and cultures. To maintain this, we need to re-impose diverse and multiple degrees of drive and friction in all areas of exchanges between nations so that each nation can continue to govern itself or fail without bringing down the system.
    Globalization and rational, centralized, efficient management would produce a system which rapidly becomes inflexible, collapses, and implodes the human population. However, on the positive side, that sequence will give the remaining human beings another shot at diversity.
  • James Crawford

    Thank you so much for responding. It prompted me to read your October 2015 National Workshop paper to gain a better understanding of your MAC proposal.

    First, please forgive me for referring to as a “financial widget”. Although in my defense I would note that you yourself refer to it as a “mechanism”, a “tool”, and formulate it in purely financial terms.

    But your narrative, nevertheless, does indeed step beyond “widgetdom” on two counts: your diagnosis of the malady, and the applications of a remedy based upon the context of the situation.

    I am reminded that in “The General Theory” Keynes remarks at one point that he used to believe what the classical economists had taught him. It appears to me that what you, Edwin, and I have in common is having each in our own way made a similar journey.

    I was very glad to see that you featured one of Jeff Ferry’s essays on your own blog, as I believe you may be able to find ways to partner with CPA.

    Consensus, however, is a far more difficult objective to reach than that of building a coalition of compatible, if not kindred, spirits. I would guess that you have advanced the MAC argument to the limits and then some of what most American economists are willing to entertain. But there are nevertheless strategic points in your discussion where new openings can be made to enable other audiences to find common ground.

    As with Edwin, if you would like to discuss things further, I can be reached by email at crajim@gmail.com. But I will say unequivocally that your proposed MAC is a brilliant, timely, and indispensable.


  • John R Hansen
    James, I am actually very much on the same wavelength as you and Edwin. I have long objected to the mechanical linkage of exchange rates to fixed quantities of physical gold — and to other variants such as gold-exchange standard and gold-dollar standard under the Bretton Woods agreement. Likewise, I object to the opposite — the complete lack of a system linking exchange rates to some stabilizing anchor. And that is exactly what we have had since the world moved to floating rates in the 1970s after the gold-dollar linkage collapsed.

    Trade balances are driven by differential rates of change across countries in key areas such as productivity; labor force size, training and participation rates; rates of monetary and credit expansion; rates of inflation; and exploitable resource endowments to name but a few. With all of these moving parts, it is wrong to think that national and global trade balances can be maintained with exchange rates that are rigidly fixed.

    Likewise, given the extreme volatility in global capital markets made possible by electronic communications and many related factors that can drive trillions of dollars across borders in a single day, it is wrong to think that a floating rate system with no anchors will produce the stable growth needed for shared national and global prosperity.

    I therefore created the Market Access Charge (MAC) to establish a dynamic but stable link between exchange rates on the one hand and trade balances on the other. Like biologic systems, the link — the rate of the MAC charge — varies depending on global financial and economic conditions, which are always changing. But the link is stable because it always moves the system back to balanced trade — just like living creatures constantly adjust to maintain a stable body temperature.

    The MAC is not just a “new financial widget” created by some financial engineer. In fact, it represents a profound systemic change in the way global financial flows adjust to accommodate physical and other changes in global trade.

  • James Crawford
    Edwin, We have a lot in common, including beginning our careers as engineers. I was fortunate enough, however, to have an opportunity to return to academia for a number of years to study business, sociology, rhetoric, and communication. And my comments to you and Mr. Hansen come from my studies in the liberal arts.

    I would enjoy carrying on a discussion with you anytime and can be reached via email at crajim@gmail.com.

    As to the concept of homeostasis, I would say that language provides much of the feedback we depend upon to maintain our balance. And the platform economists use to make their claims is idealism, whose roots in Western civilization reach all the way back to Plato.

    In any case, I would be delighted if Mr. Hansen would also respond further. Managing international trade requires all the wisdom that the West has to offer.


  • Edwin Lee
    Thanks James for your insightful comment. From my perspective, it hits the nail on the head with one minor exception. It turns out I’m a retired electrical engineer, entrepreneur and former CEO in hi-tech. I was once a fan of globalization and rational, mechanistic solutions to all problems. However, early on, I learned that management doesn’t work that way.

    I’ve invested the last 20 years studying biology, evolution, neuroscience, microbiology, economics and politics. I’m no longer a fan of globalization because it’s clear to me that it’s unsustainable and will result in a human population implosion. It is likely to happen within the next 30 years, as we destroy the carrying capacity of the biosphere upon which we utterly depend and as relentless evolutionary processes work the biosphere back into homeostatic balances. I keep hoping we’ll use our intelligence to work with these processes rather than against them.
    The battle over global warming is a skirmish between the two schools of thought you identified.

    Homeostasis seems to me to be the key to the sustainability/change dynamic balance of the environment just as it’s key to the sustainability/change dynamic balance of our bodies and minds. Its basic idea is: global stability from local diversity in sources, sinks and feedback loops. Its hierarchies are of relative influence, i.e. strength of feedback, rather than relative control. Market economies with diverse buyers and sellers with varying, shifting motives enabled a healthy, dynamic balance between stability and change. However, rational sellers whose risks are greater than those of buyers, consolidate selling systems and replace homeostatic process with hierarchical controls. A basic flaw of economics is to assign only rational motives to economic processes and then try to manage such actions through centralized, hierarchical control.

    Likewise, a community of diverse nations would be more sustainable, though locally more volatile, than a rationally managed global world. Well regulated borders are essential to diversity. I’m working on a book that ties all this together.
  • James Crawford
    Very interesting exchange of views between Mr. Hansen and Mr. Lee. Note the convergence of two fundamentally different perspectives: Hansen as a financial engineer employing a mechanical approach to the global trading “system”; and Lee as a biologist employing an organic approach to the entities within that “system”.

    It is essential to maintain these two perspectives and allow them to sustain constant friction.

    As to the MAC itself, clearly a useful tool devised practically in response to specific historical circumstances. Mr. Lee’s line of critique is especially valuable because America’s mainstream economists think exclusively in the formal, mechanical terms of financial engineers – forcing the square peg into the round hole whether it fits or not in the process.

    The advantage of Mr. Lee’s perspective, in my opinion, is that it brings into view the idea that trade is a process that must be continually managed, rather than just a mechanical problem that can be “fixed” with a new widget.
  • John R Hansen
    Edwin, thanks for your comments and support. One point of clarification. Yes, a $7 trillion horse has already left the barn — but if we don’t implement something like the MAC now, we are going to lose more very valuable horses such as additional US factories and jobs — while accumulating more trillions of net external debt. Furthermore, since the MAC attacks the core cause of America’s trade deficit, it provides an excellent way to actually cure the “cancer” of and overvalued dollar and its fatal impact on American factories and jobs. The MAC is not just palliative like ordinary tariffs or quotas that simply mask the problem. The MAC is also curative — and it is doubly effective because it stimulates exports as well as reducing imports.

    You also note that the MAC “smacks of an action which blames the other parties for our systemic weaknesses. We would be better served to rethink what it takes to maintain our national autonomy and to maintain essential political and economic exchanges with the rest of the world. A sustainable solution is one which would work for other nations as well as ourselves.”

    When you have had more time to study the MAC, I think you will find that it is actually a winner on all three of these points.

    First, rather than blaming our trade deficits on currency manipulation by counties like China and Japan, the MAC says, "America has a problem caused by many factors, including the “exorbitant privilege” of issuing the world’s premier reserve currency, and American needs to fix this problem in a sensible manner."

    Second, the MAC will strengthen America’s sovereignty. Instead of saying that our trade deficits can only be fixed if other countries like China do what we tell them to do, the MAC is designed so that, without violating IMF and WTO rules, America can implement the MAC unilaterally.

    Third, the MAC is highly sustainable and “would work for other nations as well as ourselves.” In fact, in terms of international trade, the best of all possible worlds would arrive if other countries were to “retaliate” by implementing their own MACs. By design, the MAC can never be used by mercantilist countries to increase trade surpluses because it is triggered only when trade deficits exceed say one percent of GDP.

    On the other hand, consider what would have happened if the MAC had been implemented in the 1990s by the Eurozone countries. The Eurozone crisis was driven largely by excessive intra-zone, cross-border borrowing – especially from Germany by countries like Italy and Spain. If the MAC had been in place, it would have been triggered by rising trade deficits in the Southern Tier countries, and the MAC charge would have moderated intra-zone capital flows to levels consistent with domestic prices that, in turn, were consistent with sustained international competitiveness for these countries. In short, a MAC almost certainly would have prevented a crisis that is still not resolved today -and implementing one today could help prevent another similar crisis in the future.

    For more on the MAC, please see postings on Americans Backing a Competitive Dollar, Now! (www.abcdnow.blogspot.com)
  • William Ryan
    True open markets have no lobbies but big corps and special interests do. We went from free trade that was suppose to benefit the many to free trade that benefitted the few. Concentrated wealth and economic power leads concentrated political power. Large corps have more political influence and have more control of the rules of the road regarding the current structure of global trade. Whereby through logic audits and economic conditioning they justify their stand by saying in business I’m right if I have a good bottom line or MSV. So how will we reform capitalism and globalism to prevent concentrations of decision making power, political power and wealth hoarding by global elites?
  • Edwin Lee
    Although the MAC proposal has merits, it is a bit like locking the barn door after the $7 trillion horse is out. This proposal like so many others is an attempt to ameliorate the symptoms of a cold in a patient dying of cancer.
    The Constitutional basis of our government is the protection of and economic prosperity of its citizens. An essential element for both priorities is well-regulated borders. Borders for what? I suggest that we need borders for anything whose density within the nation necessarily differs from that outside the nation or which the nation must maintain, manage or protect to enable self-government. I suggest that these things include: people, property, money, jobs, diseases and other biological hazards, and information. Technical advances in transportation eliminated natural borders for trade. Free-trade regulations required our nation to annihilate its “tax” borders for goods, services, and jobs. A global internet destroyed our ability to regulate the flow of information into and out of the country. (Note that ISIS propaganda and Russian hacking are two obvious consequences.)
    You and I have the same self-protection requirements as nations; we are all autonomous systems in host environments. We too have well regulated (and multi-layered) borders to support our self-preservation system, prevent the dissipation of our internal resources, enable us to manage them to our personal priorities and to protect us from external threats as we conduct essential exchanges with the rest of the world.
    Breton Woods established the US dollar as a global currency which annihilated our ability to manage it. It was a bold, generous move at a time when the other world economies were recovering from WWIIWe had similarly generous tax policies which encouraged investment in other nations. Since the 1980s, these changes have contributed to our budget deficits and the bloated dollar.
    Note that China has managed its borders for currency, information, and jobs. It has prospered while the USA has declined. I suggest that the Chinese, when it comes to maintaining an effective self-governing system with regulated borders, have done the intelligent thing while we, with the hubris that comes from too many years of being top dog, have thrown away structural elements required to maintain national integrity.
    A MAC tax, or something like it, might be part of an overall solution. However, it smacks of an action which blames the other parties for our systemic weaknesses. We would be better served to rethink what it takes to maintain our national autonomy and to maintain essential political and economic exchanges with the rest of the world. A sustainable solution is one which would work for other nations as well as ourselves.
  • William Ryan
    Very interesting distinction using the MAC rather than tariffs is because the MAC puts the fee or charge on the principal invested in the US assets controlled and administered much easier by the Treasury, does not specifically target any country, all nations would pay and would be counted in billions and the fee would be in 50 basis points or 1/2 of 1%. This will actually be a small fee or tax to use our currency to restore greater exports and reduce imports thus encouraging other countries to increase greater consumerism within their own countries and us too. The MAC will provide downward pressure on the USD making much better for MFG , not up for the banks…Why didn’t I think of that.
  • Harry Moser
    Excellent article. The Reshoring Initiative has been helping Dr. Hansen and promoting MAC for a year or two.
    The U.S. stability makes us a safe haven for excess cash, driving up the USD. As a result we are a great place for banks,but not for manufacturers.
  • Harry Moser
  • William Ryan
    Love everything I read here . Please send it quickly over to Eco View.com so we all can get on the same page. This is a great solution but one must always watch for unintended consequences…
  • James Crawford
    One of many conceptually interesting proposals. One strength is that it avoids singling out any one nation, i.e., China, as a bad guy. Another is that it clearly differentiates between “us” and “them”, which is essential for countering the globalist vision.