In late August, The New York Times ran a provocative op-ed by Jared Bernstein entitled "Dethrone King Dollar."
Yes, here was a former White House economist -- Vice President Joe Biden's chief economist, no less -- arguing that the dollar's status as the world's reserve currency is a "privilege...America can no longer afford."
Since that time, the dollar has been in rally mode and forecasters are now predicting the greenback will continue to appreciate against major rivals. Deutsche Bank predicts the euro will trade below parity with the dollar by 2017, a 25% decline from current levels which is a huge move for a major currency -- especially one that has already fallen 10% vs. the dollar since May. The Japanese yen, meanwhile, is "a troubled currency and likely going much lower in coming years with the [Bank of Japan] intent on taking its balance sheet to 50% of GDP," writes Peter Boockvar, chief market analyst at The Lindsey Group.
A stronger dollar would seemingly undermine a central tenant of Bernstein's thesis: the U.S. trade deficit -- which hit $475 billion in 2013 -- is costing America jobs and economic growth. In addition, the sharp growth in U.S. energy production -- to the highest levels since 1986 -- should also help bring the trade deficit down: oil imports comprised over 40% of the deficit from 2000-12, according to the Council on Foreign Relations.
But Bernstein isn't backing down, as you'll see in the accompanying video.
"I think if the dollar were not nearly as prominent as global reserve currency we'd definitely be better off," he says. "By dint of the dollar being a reserve currency, we're facilitating surpluses, which makes it hard for manufacturers to compete globally."
To be clear, the U.S. economy can grow in the face of a trade deficit, but "you have to have a lot more consumption, investment or a lot more government spending," Bernstein says. "By dint of supporting large trade deficits, we've had consumption bubbles, investment bubbles and budget deficits. It's all connected in a very important way."
That connection is the basic calculation of GDP as Consumption + Investment + Government Spending + Net Exports. "If next exports are negative, by definition it's a drag on growth," he says.
At this point, Bernstein stressed he isn't calling for a weaker dollar (or a stronger one for that matter) but that the dollar's value should be set by the free market vs. "currency management countries" -- most notably China -- "that accumulate reserves in order to boost value of the dollar against their own. That's the problem."
And here's the rub: The U.S. has long criticized the Chinese for manipulating its currency, even as they've more recently allowed the yuan to trade in a wider band vs. the dollar and pushed for trade to be settled in yuan (vs. dollars) in various dealing in Europe and South America.
Should the dollar continue to strengthen ahead of the 2016 election, expect Bernstein's focus on the trade deficit to rise from the economic-wonkosphere into the realm of mainstream politics, where the law of unintended consequences very often comes in play.