Book Review: Making Sense of the Dollar
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As the US recovers from its deepest recession and worst financial crisis since the Great Depression, many financial practitioners and business people have made dire predictions about the state of the American economy and the country as a whole. In Making Sense of the Dollar, Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman and former chief currency strategist for HSBC Bank USA, debunks several myths about, among other things, trade deficits, current account deficits, personal savings, capital flows, currency markets, multinational corporations, the rise of China, the specter of socialism and the nature of capitalism. Chandler skillfully challenges these myths and asserts that the US dollar will remain the numeraire or key metric in the world economy in the foreseeable future.
Despite a persistently large trade deficit, America remains a vibrant and innovative country with per capita GDP and productivity growing in its favor. In 2008 the US recorded 157,774 patents with IBM alone registering more than 4,000 of those patents. This single US corporation is responsible for more patents in 2008 than those of all the companies in China combined. Chandler argues that the dramatic decline in manufacturing jobs in the US is not due to China or an overvalued dollar but rather technology; US manufacturing output has grown even though the absolute number of manufacturing jobs has shrunk. American workers are more productive than ever as they have the ability to make more things, better, and with fewer people. Chandler argues—correctly, in this author’s opinion—that America’s most important investment is in people and idea generation. The cultural, ethnic, and socioeconomic diversity of America breeds a cross-fertilization of ideas that often invigorates the creative and competitive process.
A surprising argument outlined in the book suggests that a weaker US dollar or devaluationist strategy does not merely reduce the trade deficit but actually inflicts material harm. Since the American business model is “build locally/sell locally,” a weak dollar makes it more expensive for US companies to pursue their foreign direct-investment-led strategy while at the same time making it less costly for foreign business to adopt the same strategy in America. Cross-border movement of capital is far greater than trade flows globally. Exports are not the primary way in which US companies service foreign demand. Sales by foreign affiliates of US multinational companies exceed exports by a factor of four. One of the more interesting facts in the book is that intrafirm-trade accounts for roughly half of the US trade deficit. In addition, purposely seeking a weaker dollar may interrupt capital markets by calling into question America’s commitment and ability to absorb the world’s excess savings.
Chandler mentions that the US dollar is not just the world’s key reserve asset but also an invoicing currency even for trade that does not involve the US or an American company. Many commodities continue to be denominated in dollars such as crude oil and gold. One of the most important and underappreciated factors that support the dollar’s preeminent role in the world economy is the backing of the deepest and most liquid bond market in the world, the US Treasury market. The breadth and depth of the US Treasury market give it unrivaled liquidity and transparency.
A combination of other attributes—such as political stability, rule of law, property rights, general rules that support entrepreneurship, and the greatest military power in the world—play an important role in why sovereign countries continue to freely allocate a large part of their cash reserves to US dollars. Ultimately, in Making Sense of the Dollar, Chandler presents strong and compelling arguments why the American dollar will remain the numeraire for years to come.
–Mark K. Bhasin, CFA, FRM, CAIA is a senior director of originations at Palisades Financial, a real estate private equity fund based in the New York City area. He is also an adjunct professor at Columbia University and SUNY Stony Brook.