Edward Conard

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  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
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  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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Upside of Inequality Oxford Unintended Consequences

AI Summary. Dollar strength is attributed to sustained U.S. capital spending, with private fixed investment excluding housing holding a high share of GDP, a 10-year average for private investment at its highest since the Reagan era, and research-and-development spending at all-time highs as a share of GDP. This investment and U.S. leadership in innovation and energy production attract foreign capital.

James Mackintosh Wall Street Journal
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The persistent strength of the dollar is largely driven by a long-term increase in American capital spending, with U.S. private fixed investment, excluding housing, stabilizing at a high share of GDP. @JamesMackintosh @WSJ.

Does strong U.S. investment and innovation explain the dollar's strength?

Core argument: The 10-year average of U.S. private sector investment is the highest since the Reagan era, and research-and-development spending has reached all-time highs as a share of GDP.

The persistent strength of the dollar is largely driven by a long-term increase in American capital spending, with U.S. private fixed investment, excluding housing, stabilizing at a high share of GDP. This trend avoids the boom-and-bust cycles seen in past dollar fluctuations. The 10-year average for private sector investment is now the highest since the Reagan era, and research-and-development spending has reached all-time highs as a share of GDP. This sustained investment, coupled with U.S. leadership in innovation and energy production, attracts foreign capital and supports the dollar's strength. Additionally, deglobalization may further extend this cycle by necessitating more domestic capital deployment and slowing the spread of new inventions. Despite short-term fluctuations due to interest rates and recession fears, the U.S.'s economic vitality relative to other developed nations suggests the dollar could remain strong for an extended period.

Takeaways by Macro Roundup® AI

  1. The 10-year average of U.S. private sector investment is the highest since the Reagan era, and research-and-development spending has reached all-time highs as a share of GDP.
  2. U.S. private fixed investment excluding housing has stabilized at a high share of GDP, avoiding the boom-and-bust cycles that accompanied past dollar fluctuations.
  3. Sustained American capital spending, innovation leadership, and energy production attract foreign capital and support the dollar, and deglobalization may extend this cycle by requiring more domestic capital deployment and slowing the spread of new inventions.

"...This latest dollar uptrend has already run longer than each of the periods of multiyear gains since the greenback was taken off the gold standard by President Richard Nixon in the early 1970s.Mr. Barth thinks it could run much longer still, because something interesting has happened with capital spending. U.S. private fixed investment, excluding housing, has stabilized at a fairly high share of GDP, avoiding the boom-and-bust of past dollar cycles. Despite frequent complaints that the private sector doesn’t invest enough, the 10-year average is now the highest since Ronald Reagan left office. Research-and-development spending is also at all-time highs as a share of GDP..."

Why Is the Dollar So Strong? American Innovation: Extended Excerpt Image 1

Why Is the Dollar So Strong? American Innovation: Extended Excerpt Image 2


James Mackintosh, "Why Is the Dollar So Strong? American Innovation,"Wall Street Journal, September 11, 2022, https://www.wsj.com/articles/why-is-the-dollar-so-strong-american-innovation-11662903959

Why Is the Dollar So Strong? American Innovation

The dollar is having a once-in-a-generation surge of supremacy over the world. After 11 years and a 40% gain on a real trade-weighted basis, some are starting to wonder if it is time for a fall.

In the short run a weaker dollar is plausible, as Europe’s governments absorb the financial threat to their economies from energy prices and foreign central banksrush to catch up with the Federal Reserve on rate rises. The burst of optimism in the markets on Friday led the dollar to fall back, as money that had sought it out as a haven left again.

But the long periods of strengthening or weakening in the past haven’t obviously coincided with the economic or monetary policy cycles. Something else has been going on, and to try to spot the end of this megacycle in the dollar we need to consider what.

Why Is the Dollar So Strong? American Innovation: Extended Excerpt Image 3


Marvin Barth, a former U.S. Treasury economist, thinks it is all about innovation. He now runs an independent research firm called Thematic Markets and his basic thesis is that the U.S.’s leading position in academic research, and the close links of universities and business, gave the country a head start in computerization in the 1970s and early 1980s, in the internet in the 1990s and in newer internet applications and artificial intelligence more recently.

Each innovation sparked a wave of investment to take advantage of it. This improved profitability and attracted foreign capital—pushing up the dollar.

Inventions don’t stay in one country for long. But in each case America’s head start gave it a few years’ lead before investments elsewhere looked as profitable. By then, the earnings generated had flowed out into society and funded a consumption boom that eventually turned into a housing boom. To finance housebuilding, the U.S. sucked in capital even after losing its competitive advantage—so the dollar had to fall to make it attractive to foreign money.

The story is a nice one, and helps explain how the dollar’s long-run trends can carry on even through the temporary interruption of recessions.

As evidence, Mr. Barth studied the length of cycles for various economic variables by using a frequency-analysis technique from engineering. The cycle for the share of capital spending in gross domestic product matches that of the dollar, at about 17 years, while things important in the short term, such as monetary policy, have little influence at such a long horizon.

There’s nothing magical about past cycles having been 17 years long, and no reason to think future ones will be the same length. This latest dollar uptrend has already run longer than each of the periods of multiyear gains since the greenback was taken off the gold standard by President Richard Nixon in the early 1970s.

Why Is the Dollar So Strong? American Innovation: Extended Excerpt Image 4

Why Is the Dollar So Strong? American Innovation: Extended Excerpt Image 5


Mr. Barth thinks it could run much longer still, because something interesting has happened with capital spending. U.S. private fixed investment, excluding housing, has stabilized at a fairly high share of GDP, avoiding the boom-and-bust of past dollar cycles. Despite frequent complaints that the private sector doesn’t invest enough, the 10-year average is now the highest since Ronald Reagan left office. Research-and-development spending is also at all-time highs as a share of GDP.

Also potentially extending the cycle is deglobalization, which will both require more capital to be deployed domestically to replace international supply chains and hinder the spread of new inventions.

Even investors who don’t buy the innovation story can’t deny that the U.S. has done a far better job than the rest of the developed world in rebuilding its economy since the financial crisis. It now has the advantage of being an energy powerhouse too, thanks to another U.S.-led innovation, fracking.

“This cycle is very much about U.S. economic supremacy,” says Kit Juckes, head of FX strategy at Société Générale, who thinks it might be nearing its top.

In the short term, the usual issues of interest rates and recession fears will swing the dollar around. But if the U.S. can maintain its economic vitality relative to the rest of the world, the dollar could stay high for a long time yet.

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