May 19, 2003

Perhaps John Snow Was Trying to Say Something Intelligent...

Perhaps Treasury Secretary John Snow was trying to say something intelligent. Probably he was. He might have been attempting to say one (or more) of several things, like:

  1. I don't determine the value of the dollar, the market does. The market determines the value of the dollar based on the relative attractiveness of dollar-, yen-, pound-, and euro-denominated assets. I don't have any effective influence over the attractiveness of dollar-denominated assets, but Alan Greenspan does. Go ask him how he thinks his monetary policies are affecting the value of the dollar.
  2. If two of the world's major economies are in deflation, the third will see the value of its currency decline. That's just arithmetic. If you think I'm trying to have the U.S. join the eurozone and Japan in deflation just to maintain the exchange value of the dollar, you're nuts.
  3. Currencies fluctuate for good and bad reasons. Don't try to overinterpret or overanalyze their movements. They're not news unless you're way long or way short.

But the problem is that he failed to make sure that the financial market headlines were keyed off of some form of the following paragraph:

Although the value of the dollar is a price set in financial markets, when the United States has a strong economy that strength sooner or later but eventually produces a strong dollar. Regardless of short-term market fluctuations, the economic policies of the Bush administration are intended to produce and are producing a strong American economy. Thus it is necessarily true that the Bush administration's economic policy is a strong dollar policy.

The problem is that for decades the Treasury Secretary's words on the dollar have been taken at an extreme discount. So whenever the Treasury Secretary says, "It is the policy of the U.S. government to drive up the dollar," markets say, "Ho, hum." But whenever the Treasury Secretary says something other than, "it is the policy of the U.S. government to drive up the dollar," markets say, "Good God! The U.S. government is trying to drive down the value of the dollar!! Sell!!! Sell!!!! Sell!!!!!"

Why financial markets do this is a mystery. But they do. And the result is that--whatever else the Treasury Secretary says--he must precede and follow it by a declaration that a strong dollar is in America's interest and is the policy of the United States. And whatever else the Treasury Secretary says must not contain any quotable sound bites that undermine the "strong dollar" quotes.

Many Treasury Secretaries resist taking on this formal, hieratic role. They think it makes them look like idiots. They would rather be coherent, and appear to be intelligent people with a grasp of economic issues, rather than mere parrots that repeat, "A strong dollar is in America's interest! Squawk! A strong dollar is in America's interest!"

Tough. They need to learn to deal with it.

Treasury Secretaries can send out their subordinates to make--on background--more coherent, more complicated, more sensible arguments about the place the value of the dollar plays in American economic policy. But they themselves are in a very different position...

Posted by DeLong at May 19, 2003 04:25 PM | TrackBack


But isn't it at least somewhatbecause of the convention of countries finance ministers exaggerating their commitment to a strong currency that such responses in financial markets exist? If financial markets didn't anticipate a currency tanking when a finance minister was equivocal about, they'd probably see less reason to sell (ah, the wonderfully convuluted chain of cause and effect in financial markets...).

Meanwhile, finance ministers talking about how great strong currencies are can seep into the domestic political consciousness, infecting people with a sense that their national status is determined by the exchange rate of their currencies.

Perhaps if finance ministers were more honest, the currency would go down at first, but upon seeing arbitragers who pay attention to fundamentals taking advantage of skittishness to make money in the longer run off of more short-run, expectations-oriented traders, perhaps they'd decide to take finance ministers at their words.

Perhaps I'm being too optimistic, but I'm suspicious of schemes that involve saying "well, we'll say a stronger currency is always in our best interests, but everyone knows that just something we say, not what we REALLY mean," because people have a tendency to start believing it.

Posted by: Julian Elson on May 19, 2003 09:42 PM


Excellent, Excellent point, Brad. Bob Rubin would never, never had said what Snowe said. Any specialized group has its own code. When they say one thing, it is understood by all. The trick then is not to mean what you say, but say what you mean, in code.

Those that can't speak the language have a harder time of saying what they mean.

Posted by: bakho on May 19, 2003 10:13 PM


I think that you may be straying a bit into partisan Rubinolatry here, Brad. My reading of Snow was that he said something very intelligent indeed, which was:

"There's no point in *being* the global military and economic hegemon if you don't take advantage of it to inflate your debts away once in a while. Our fiscal stimulus policy has fallen victim to the usual snafu, so we're going in for a good old fashioned competitive devaluation and you the 'financial markets' can suck it up. All the assets that the French, Germans and Asians picked up over the last ten years are going to be worth about sixty cents in the dollar by the time we've finished and you may consider this to be the tribute you pay us for picking up the bill for global military security. F**k you very much and Buy American".

I've made it sound more bellicose than it is for fun, but seriously, who here believes that there is any solution to the world's economic problems which does not involve a significantly lower value of the US dollar? And how do you get the dollar lower without devaluing it?

IMO, the benign neglect of the greenback during the 1990s was a genuine policy mistake.

Posted by: dsquared on May 19, 2003 10:58 PM


>>but upon seeing arbitragers who pay attention to fundamentals taking advantage of skittishness to make money in the longer run off of more short-run, expectations-oriented traders, perhaps they'd decide to take finance ministers at their words.<<

Upon seeing such mythical creatures, one should probably seek treatment for heatstroke, just as if one had seen pink elephants on unicycles.

Think about this, Julian. Why would the arbitrageurs provide this service for humanity? Surely the strategy of stabilising speculation is dominated by one of trading with the trend, driving the currency even further out of equilibrium and only *then* going long and profiting from an even larger rise.

You can only get your model off the ground if you assume that arbitrageurs are involved in something akin to perfect competition; that they can't wait for the trend to play out for fear that some other arbitrageur will steal their profit opportunity by going long a few minutes earlier. And that's close to a logical contradiction; arbitrageurs in your model are assumed to be both small enough to be price-takers and large enough to drive prices into equilbrium.

Posted by: dsquared on May 20, 2003 02:02 AM


Bravo, Brad. By now, I doubt that Snow can have a benign neglect approach to the dollar. Too many headlines. That makes all this much more serious. But yes, letting the market set the value of the dollar seems to be what was aimed at.

Edward Hugh offers the same view as dsquared, that the latest US military victory somehow makes us able to demand and get fx market results. Question is, how? I'll grant you that being able to pee higher on the poll than all the other dogs is impressive, but why should it affect investment outcomes? On the assumption that investors don't care diddly about anything by risk and reward, what mechanism is there to translate military victory into an investment outcome that requires a lower value for the dollar? Alternatively, what mechanism is there to translate military victory into a lower dollar directly? The US is absolutely the most effective intervener in fx markets, no question. That is in part because Rubin established a record of success. Well, he's gone and Snow says fx rates ought to be established in the market. Given what Snow has said, intervention seems unlikely, though intervention fear, for now, seems as good an explanation for the decline in the dollar over the past week or so as any other.

Except maybe overshoot. If the dollar has been falling for some time, say since August of 2002 against the euro, for instance (that's well prior to Snow coming to office), and has just reached roughly the level at which the euro was launched, Snow's dedication to market-determined fx rates would mean no response to overshoot. Overshoot is fairly common in fx markets. Rubin responded to overshoot.

Now Brad, weren't you an insider during the Rubin years? Can you please let that cat out of the bag?! What did it all mean? I have assumed for some time that Rubin, in repeating "strong dollar" regardless of which side of the market he intervened on, did not mean a mindless drive to an ever stronger dollar, or a dollar with a value during his tenure higher than its average value in some prior period. Rather, it was an effort to reduce the fx risk premium on US assets by pledging to holder of those assets that he wouldn't intentionally reduce the value of those assets through fx manipulation, as his predecessor did. What was the deal, really? Hello? Brad?... Line seems to have gone dead....?

Posted by: K Harris on May 20, 2003 07:14 AM


>>Rather, it was an effort to reduce the fx risk premium on US assets by pledging to holder of those assets that he wouldn't intentionally reduce the value of those assets through fx manipulation, as his predecessor did.<<

I think so. One thing Rubin had been, remember, was a bond salesman. And that's a good thing, because the U.S. Tresury Secretary is the world's biggest bond salesman ever...

Posted by: Brad DeLong on May 20, 2003 07:25 AM


The national security policy of the United States is supposedly something like "Forgive Russia, Ignore Germany, and Punish France" (FRIGPF if that's a useful acronym.)

I've predicted privately since the start of the Iraqi controversy that the dollar was to fall (or be pushed) against the Euro as the most tangible yet covert form of punishment.

The greatest security risk in such a policy was a euro-demonimated oil market but that's of little concern post-Iraq.

Posted by: Joseph Somsel on May 20, 2003 08:24 AM


The "punish France" view has one weakness, though not a deadly one. Punishing France cannot be separated from punishing Spain. Or Denmark (Denmark was "willing" wasn't it?). It's pretty tough, with dollar weakness as a tool, to separate punishing France from punishing Japan, also among the "willing" and very dedicated to the notion that the yen's level is an important economic tool. If the Bush administration is more set on punishing France than rewarding the "willing" then this policy is a possibility. However, so far Snow has snapped only at Japan, indirectly, by saying intervention ought not be done.

Oh, and thanks Brad. In case you couldn't tell, I sort of thought you had to swear a blood oath not to talk about such matters.

Posted by: K Harris on May 20, 2003 08:48 AM


Had Snow told the customary and recommended lies, you guys would all be Banging Your Heads Against The Wall™ over the terrible mendacity of the Bushies. There's no pleasing some people.

Posted by: Paul Zrimsek on May 20, 2003 10:06 AM


I'm with the John Snow defenders on this one. In the long run, it can't be in the best interest of the US for Treasury Secretaries to be required to pledge fealty to a policy they don't believe in.

What if future necessity dictated the US actually have a strong dollar policy? What would the Treasury Secretary do then? Announce the really-really-super-duper-strong dollar policy?

Posted by: Walt Pohl on May 20, 2003 11:37 AM


Sec. Snow certainly fumbled and stumbled over this dollar thing but with our net exports being negative $500 billion, what is so bad about a devaluing dollar at least from a U.S. perspective? Yes, this will lower aggregate demand in Europe but maybe that will encourage the ECB to run easier monetary policy or the fiscal authorities to say the heck with the deficit restraints from the EU agreement.

Where Sec. Snow really fumbled and stumbled was in his latest interview with Tim Russert. Russert is a deficit hawk and he does come to Meet the Press very well prepared. Sec. Snow's comments on deficits stood in direct contrast to the many quotes from private citizen Snow.

Posted by: Hal McClure on May 20, 2003 11:48 AM


You know it's bad for Snow when he gets slammed by a WSJ editorial, as in today's (Tue) edition. Sadly no free web link available.

Posted by: P O'Neill on May 20, 2003 11:50 AM


eRm im not ok at all with u guyz...
This just cannot be!! Where r u comin from?
oh jesus ... I d like to uinderstand u but i just think i cant do anythin for u :(

Posted by: pIwIbAbO on December 19, 2003 03:28 AM


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