An Urban's Rural View

Back in the early 1970s, the White House's chief economist, Herbert Stein, enunciated what has come to be known as Stein's Law: "If something cannot go on forever, it will stop."

At the time critics were urging the government to do something about America's trade deficits, which the critics said "cannot go on forever." Stein's response was, in essence: No action needed. If the deficits are a problem they'll take care of themselves.

Were the critics wrong in thinking deficits can't continue forever? Or was Stein wrong in thinking they'd self-medicate? Whichever, the U.S. since Stein's day has run trade deficits for 39 consecutive years. According to the Census Bureau (http://tiny.cc/…), our last surplus was in 1975.

In economic theory Stein's law makes sense. When a country runs deficits its currency loses value, which makes its exports more competitive, which eventually turns the deficits back into surpluses.

And yet as farmers and ranchers know all too well, the U.S. dollar has refused to cooperate with this theory. This year the U.S. trade deficit will exceed $500 million, as it has every year since 2003. Yet the Japanese yen is down 7% against the dollar since August, sinking to a six-year low; the euro has tumbled to 125 to the dollar from 140 in just two months.

Dollar strength makes American ag products more expensive to foreigners, hurting exports. DTN Contributing Analyst Elaine Kub concluded recently that the dollar's continued strength these last several months has taken 24 cents off the price of a bushel of corn (http://tiny.cc/…).

How long can the mighty dollar keep flexing its muscles? Alas for agriculture, it could continue for months or even years.

The dollar's value, we've learned over the last four decades, has more to do with flows of money than flows of goods. Even if our imports far exceed our exports the dollar can remain strong if foreigners prefer to invest their savings in the U.S.

Why would they want to? Because the dollar is the world's reserve currency, Uncle Sam can borrow in dollars. And he borrows so much -- nearly $18 trillion at last count -- that the market for U.S. government bonds, notes and bills is very large, very liquid and relatively safe. It's a convenient place for foreigners to park surplus funds.

Foreigners have a special reason to move investment money to the U.S. just now. Our economy may not be batting .300 but it's outslugging economies abroad. After years of easy-money "quantitative easing," the Federal Reserve is ending its extraordinary bond purchases and debating how soon in 2015 to start raising interest rates.

Meanwhile, the European Central Bank, the Bank of Japan and other foreign central banks are treating their ailing economies with fresh doses of easy-money amphetamines.

It's this differential in economic performance and central-bank response that's boosting the buck. And judging by the fall in the U.S. jobless rate to 5.9% in September, the lowest in more than six years, the differential is likely to continue.

How long is anyone's guess. Who knows when the rest of the world will get its economic act together? When our economy will hit the skids? When a terrorist hacker will take down the U.S. financial system? Financial markets can turn on a dime.

After 39 years it's still unclear whether trade deficits can go forever. Dollar strength cannot. A glance at the currency charts assures us of that.

But it can go on for a long time. Someday, money will chase higher returns elsewhere and the dollar will weaken. For now the safest, most profitable place to put money to work is the U.S. As long as that continues, the dollar will be strong.

Urban Lehner

urbanity@hotmail.com