Charging Windmills
America's Strong Dollar Policy
by David Neyer
KGS Capital
November 6, 2003

Don Quixote de la Mancha along with his portly companion, Sancho Panza, rode away in his quest to rid the world of its many evils. Don Quixote saw injustices everywhere - dragons, giants, damsels in distress. Most of the perceived wrongs were delusions, the most famous being the windmill he charged thinking it to be a giant. Sancho Panza, his loyal squire, saw the illusions for what they were, but either out of ignorance, his desire to please, or fear of losing his paycheck, never corrected his employer. Why, you ask, did I outline Miguel de Cervantes' masterpiece? Because in many ways, it parallels America's strong dollar policy.

Enter Treasury Secretary John Snow who has lowered his lance at a perceived dragon (China) and a samurai (Japan). US policy attacks the Chinese dollar peg and Japanese central bank open market intervention, while at the same time speaks of a strong dollar policy. Snow even goes so far as to argue the dollar policy is not about the strength vis-�-vis other currencies, but rather its store of value and usefulness in trade. By definition, a strong dollar is strong due to its relative purchasing power. If the dollar buys fewer yen than before, it is weaker. Any currency can be used for trade. Therefore, Secretary Snow is either delusional (a la Quixote) or unable to speak the truth (a la Panza).

In the book, Don Quixote charges the windmill and injures himself in an unsuccessful attempt to slay a giant. I fear the same fate for America. Should the US pressure the Asians too forcefully, Asian investors, fearful of having their assets devalued, may become jittery and vote with their pocketbooks. Asset reallocation would result in significant downside pressure on the dollar. If the Asian banks ceased purchasing US treasuries, let alone started selling their sizeable holdings, the US bond market could topple. If these two potential difficulties are handled improperly, a full scale rout could ensue.

Again, I do not know which character Snow represents. However, I have a good idea where the American populous falls in our story. Rocinante, the barn nag who bore the brunt of Quixote's folly, is taken for a ride and then forgotten while Quixote retired in pleasure. Snow will walk away to a comfortable retirement while we struggle with higher prices in raw materials and higher interest rates on our homes. I tell you this so that you can take measures so Don Quixote will be a fictional masterpiece rather than a bitter reality.

© 2003 David Neyer
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David Neyer, Chief Economist
KGS Capital
Omaha, NE USA
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