Are We Getting A Snow Job On The Dollar?

The falling dollar is the best thing that could have happened to the U.S. economy, given today's difficult circumstances, former U.S. Treasury Secretary John Snow insisted in a speech last week in Manhattan before the insurance industry's best and brightest at a gala dinner hosted by Lloyd's. While I appreciated his point, I begged to differ.

While acknowledging that the economy is sputtering, “we'd have a real crisis if the dollar was not trading as [low] as it is now,” he told the gathering. “The American economy is resting on the dollar. Exports, fueled by a cheap dollar, are the only thing keeping the economy going.”

He went on about this for awhile, talking about how our booming exports are covering up a lot of other sins–such as the housing market's collapse and the explosion of debt throughout the economy.

However, during the Q&A, I once again played the familiar role of skunk at the garden party, raising the problem of soaring oil prices, and the shock waves energy costs are sending throughout the U.S. and global economies.

I noted that while it's popular to bash OPEC and other big oil producers–including our own oil companies–as ruthless profiteers, in fact the falling dollar is perhaps the biggest culprit, since oil is priced in plummeting U.S. currency. It only makes sense that if the dollar keeps dropping, oil sellers have no choice but to keep boosting their price to maintain the relative value of their precious commodity.

Therefore, I asked, isn't the weak dollar hitting our economy in the gut like a boomerang, since it ultimately means skyrocketing oil prices?

“There's no doubt there are negatives” to the falling dollar, Mr. Snow conceded. But he quickly added that on the bright side, “there are unintended benefits of higher oil prices.” He noted that soaring oil costs “might alter behavior in the long term–encouraging less driving, as well as the purchase of smaller, more fuel-efficient cars.”

He also said higher prices might be a wakeup call for Americans, providing both economic incentives and political cover for those seeking new oil supplies (such as drilling offshore, as well as in the Alaskan wilderness), while encouraging development of alternative power sources.

The biggest fear, Mr. Snow said, is not a falling dollar or rising oil prices, but “a political and regulatory overreaction.”

“The last thing we need is a Sarbanes-Oxley-type of overreaction to the mess we're going through,” he said–referring, of course, to the strict compliance demands made of companies and their officers in the wake of the Enron scandal.

“The financial markets blow up from time to time,” he said, citing the dot.com and housing implosions as just two examples. “The point is that the private market reacts and compensates. The market itself corrects these mistakes, and will do so again if given time.”

“We all want the dollar to come back,” he concluded, “just not too fast, because that would mean a crippling recession, rather than the mild correction we are experiencing now.”

Better regulation, not just more, is the best response, he advised. “We already have way too many regulators in the U.S., without any one of them knowing exactly what's going on or what to do about it. We need to streamline.”

So there you have it. Like an infected individual needing a fever to burn out a contagion, we're asked to wait and let the market's “invisible hand” do its magic.

I fully understand how the U.S. has turned into a gigantic 99-cent store for the world these days, with shoppers flocking here–in person or remotely–to buy up our goods and real estate.

Feeling like a pauper with worthless currency in my pockets when I traveled to London last fall was just a temporary inconvenience we Americans must bear for the greater good.

Still, the cheap dollar leaves me very uneasy. With the people of America–and its government–running up massive debts, with no end in sight to the fiscal madness, you have to wonder at what point this whole house of cards we've built might come tumbling down.

What do you folks think?