Francisco Franco Is Still Dead...
Department of "Huh?" (Wall Street Journal Op-Ed Edition)

Maintaining Orderly Market Conditions for the Dollar...

It's not clear to me that decision-making inside the Bush White House is as rational as Bob Reich thinks it is--that Paulson was brought in for one reason, or indeed for any combination of reasons at all. But I think Reich is right in assessing what Paulson's most important task is: to maintain "orderly market conditions" and to talk the value of the dollar down gradually so that the world economy has time to rebalance itself.

Robert Reich's Blog: Paulson's Real Job: Paulson was brought in to accomplish one big thing. That's to oversee an orderly decline in the value of the dollar. By "orderly" I mean gradual. The Chinese and Japanese central banks don't want a run on the dollar because they have too many of them right now, and would lose their shirts. But they understand, as does the Bush administration, that the huge global imbalances represented by their giant export surpluses and our giant debts are already causing global investors to diversify their currency holdings out of dollars and into euros and other denominations.

It's only a matter of time before the dollar ceases to be the only "reserve" currency in which global transactions are undertaken, and before investors move substantially out of dollars. So the Chinese and the Japanese would like the dollar decline to be gradual, so they can move out as well without suffering major losses. Paulson understands the Chinese economy and has good contacts with top-ranking Chinese policy makers. He's the ideal man for the job. But will global investors give him time? Or will they turn into speculators, and rush to the door too quickly for the Chinese, Japanese, and the U.S. to keep the dollar relatively strong in the interim? That's the big question.

The U.S. has a strong need for the dollar decline to be gradual as well. If $800 billion a year of financing for home-equity loan-fueled consumption spending suddenly vanishes, then 8 million workers lose their jobs in construction, consumer services, and related industries and have to find jobs in export-oriented and import-competing manufacturing. That can be done if it happens gradually over five years. It can't be done if it happens all at once.

Can the dollar be talked down gradually? Consensus economic models say no: once market expectations are that the dollar will be sharply lower in five years, speculators will make the dollar sharply lower tomorrow.

Nevertheless, there is hope: consensus economic models say the dollar crashed three years ago.