The dollar crisis

Lights, camera, economics! On Oct. 22, Dr. Brian Domitrovic, assistant professor of history at SHSU, appeared on CNBC’s The Kudlow Report to take part in a panel on a discussion of the decline of the dollar in today’s economy.

“We’ve seen the decline of the dollar numerous times before in history,” Domitrovic said. “All the decline of the dollar is is when the Federal Reserve has a target that is something other than the real demand of private markets for the dollar.”

What is happening now, says Domitrovic, is that the Federal Reserve is creating dollars much in excess of the actual demand for the dollar, making the value of the dollar decrease.

The solution that Domitrovic gives to this problem is to increase the scarcity of the dollar.

“One of supply-side economics’ greatest innovations was that you can complement monetary policy, which is over-supplying the dollar, by increasing the demand for the dollar,” Domitrovic said.

One way Domitrovic proposed for increasing the demand of the dollar is by increasing the rate of return for any economic enterprise through marginal tax cuts.

“If you cut the marginal rate, let’s say for the income tax, any economic enterprise that has to be funneled through the income tax will automatically become more productive,” Domitrovic said. “Therefore, people will seek out to make more investments because any investment will pay more money, and that increases the demand for the dollar.”

In order to gauge the market value of the dollar, Larry Kudlow’s view is that the Federal Reserve seems to be targeting the unemployment rate.

“That is to say that until the unemployment rate, which is obviously very high right now, goes appreciatively down, the Federal Reserve will keep pumping money into the system,” Domitrovic said. “This is a mistake because the Federal Reserve should not target the unemployment rate, but maybe the inflation rate or fixed exchange rates. This is not the case, however, so we are therefore stuck in this mediocre recovery.”

There have been many recessions in the history of America as strong as the one the economy is currently in other than the Great Depression.

“There were probably around 4 or 5 recessions that were as bad as this one since the Great Depression,” Domitrovic said. “The 1988 recession was worse than the one we are in now across the board and the quarterly growth rate coming out of that depression tripled the 3.5 rate that we have now for 6 quarters.” This recovery was procured, said Domitrovic, by supply-side economics.

The core of supply-side economics is maintaining the proper “policy mix” between monetary (dollar) and fiscal (tax) policy, said Domitrovic.

For the current crisis, Domitrovic suggests that the government tighten monetary policy and also cut taxes. “Cutting taxes right now would solve the dollar’s route to the foreign exchange markets,” said Domitrovic.

In Domitrovic’s book, “Econoclasts,” he discusses that even the worse of economic crises, when met with the supply side solution, were solved immediately and permanently.

“It doesn’t matter how bad it gets,” Domitrovic said. “Even if it gets really bad you can always just waltz in with the supply-side solution, and you will take leave of it right away and forever. The depressions of 1942,1947, 1962, and 1982 are all examples of this. Even if the government muddles through with this stuff for another year or two or three, if the supply-side solution comes in it will work. “

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