The strong dollar policy is a mythical policy by which the United States supposedly takes action to keep the value of the dollar strong vis-a-vis other currencies. The benefits of this would be to encourage foreigners to hold dollars because they are highly valued, which would tend to increase foreign investment into the United States and maintain the dollar's centrality to the global economy. A strong dollar acts as the global reserve currency, the type of money that central banks of all nations want to acquire because it is a safe store of value. A strong dollar policy would also make oil imports cheaper and hence tend to keep inflation down.

The only problem is that however often the Treasury Secretary and the chairman of the Federal Reserve say it, it doesn't exist. The term "strong dollar policy" dates from the late 1990s, when concerns abounded that the U.S. might actively intervene in currency markets to weaken the dollar's value. The announcement of the policy was designed to stymie this rumour. The only problem was that in the modern global economy, which is so dependent on instantaneous financial transactions that can be set off at the push of a button, the words of policymakers about their future intentions really matter. Having said it once, U.S. officials were stuck with it - stop saying it, and the markets might think something was afoot and rapidly sell dollars before they lost their value.

While the whole thing quickly became a charade that prompted eye rolls on trading floors, the dollar lost some 40% of its value between 2002 and 2008. America today continues to run massive budget deficits and have a central bank that is pumping oodles of new money into circulation, both of which tend to seriously weaken the dollar over time. And there's plenty of historical precedent - just as the Bush-era deficits went to finance wars in Iraq and Afghanistan (all at the expense of that "strong dollar"), the dollar took a similar battering under Lyndon Johnson and Richard Nixon's Vietnam War and domestic agendas in the 1960s and '70s: between 1965 and 1981, the dollar lost two thirds of its value.

So why does the idea of the "strong dollar policy" persist? The reason is simple. None of the policies that weaken the dollar - huge deficits and plentiful quantitative easing - are done explicitly because they weaken the dollar; that's just a side-effect that, up until now, hasn't caused too many problems. The Fed and the government remain committed on paper to keeping inflation - which erodes the value of the dollar - low, which is in contrast to an earlier era when inflation was regarded as relatively benign. By saying it believes in the strong dollar policy, the U.S. government is saying that - all other things being equal - that is what it wants. Those pesky wars and financial crises just keep getting in the way. When they stop even pretending, we'll know we've finally arrived in a totally new economic era.