Who lost the dollar?

October 12, 2009

The state of the dollar probably hasn’t been a first-tier political issue in the United States since, say, the presidential election of 1896. Back then, it manifested as whether or not America would stay on the gold standard or switch to a bimetallic one. (The William Jennings Bryan “cross of gold” speech and all that.)

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded.

In his New York Times column today, Paul Krugman makes the usual case for a weaker dollar: It helps U.S. exporters and is a necessary part of a global economic rebalancing. And there is some truth in that, particularly the idea that Rising Asia will result in a less-dominant dollar.

But Krugman too easily dismisses the idea that the dollar’s decline could tumble out of control. Former Clinton economic officials such as Robert Rubin and Roger Altman have been making the case that investor concern about budget deficits could lead them to abandon the dollar. As Altman argued in a Financial Times op-ed piece today: “The dismal deficit outlook poses a huge longer-term threat. Indeed, it is just a matter of time before global financial markets reject this fiscal trajectory. That could lead to a punishing dollar crisis.”

Now many Democrats and liberals, like Krugman, don’t want to hear such talk, fearing a rerun of the Clinton era when the progressive policy agenda was sacrificed on the altar of budgetary rectitude.

But that is a tremendous political and economic gamble, one that may result in taunting Republican cries of “Who lost the dollar?”

Comments

In 2002 my wife and I made a decision to move overseas. The Bush administration was talking about the “strong” dollar policy and doing nothing, trade account deficits were hitting record levels (again) and the nation was oblivious to any implication. By the time we actually made the move a year and a half later, our dollars had lost half of their purchasing power overseas, the Bush administration was still talking up “strong” dollar policy and doing nothing, trade deficits were setting record highs (again) and Americans, politicians and voters, snoozed away bored by the entire matter. We and other expats coined the newly shrunken American currency “Bush dollars”.

So when politians suddenly wake up now and take interest, I smell a skunk named “political opportunism” in the woodpile.

Posted by bill butler | Report as abusive
 

As the dollar falls and foreign currencies gain value, sure US exports become cheaper, but so do American businesses and properties. US citizens will find more competition from foreign buyers which could then drive them out of the ability to buy their own businesses and properties, losing them to foreigners. The US would be forced to adopt immigration and investment measures much like Japan, Britain and China. If the dollar falls too much, Americans will lose their way of life and that my friends combined with a tipping point is what brings revolutions. The Fed is playing with fire, their job is extremely tough right now. They can only allow enough depreciation before they know the citizens will stop work and take to the streets, there has to be enough capital flow to keep entertainment and sports going to appease the masses or else. Good luck!

 

DOSEN’T MAKE ANY DIFFERENCE THE DOLLAR WILL RISE AND FALL. TARP WAS THE REPUBLICAN SOLUTION THE STYMULUS PACKAGE DEMOCRATS WERW ALL IN THIS MESS BECAUSE OF THE GREED AND FINANCIAL IRRESPONSABILITY OF THE CORPORATE GARBAGE WHO GOD FORBID SHOULDN’T GET THEIR UNEARNED AND IMMORAL BONUSES. ELIMATE THE THEIVERY OF THE TRASH AT THE TOP OF THE CORPERATE LADDER AND MAYBE CORPERATIONS COULD AFFORD TO HIRE DECENT HONEST MANAGEMENT AND PUT AMERICA BACK TO WORK. CHARLES BOWEN (CAPTAIN CAPS)

Posted by CHARLES BOWEN | Report as abusive
 

Primary Pro’s: Exports appreciate, cheaper to invest and buy in the US

Primary Con’s: Imports more expensive, more expensive to expand off-shore.

I think it is more complex than fixing blame. There must be 150+ currencies; multiple cross rates; interest, purchase power and currency parities; multiple outcomes when assessing capital and financial accounts and relating it to current accounts and related matched assets; open and closing out forex positions. Everyone that partook in these dynamics could be blamed. That would include wars – to me it looks like the net present values of those projects were not done or was incorrect even before it all started.

I am careful of devaluation talk. In the past it was an easy ‘out’. Things have become much more complex since. As a point of debate: what if the Chinese (reserve) currency depreciates when unlinking it ?

Posted by Casper | Report as abusive
 

One thing I ponder is the way the USD-Yuan peg works. My common sense tells me that by tying the two together the two different and complementary economies reduce currency volatility. If China agreed to US urging to free float the Yuan in the market, would this send an earthquake through the overall value of the USD ?

Posted by DumbAnimal | Report as abusive
 

Con’s – that is all you can think of? how about making everything from oil to oats more expensive for the average american. How about a pay cut without having anyone actually change any wages. How about retirement savings getting devalued at rate where you end up with less value than you started with. This budget deficit attitude of our gov’t and back door inflation tax is robbing hardworking people of their wealth, that is if they have any left. We need to be honest about the resources we have, get out of these wars/occupations, pay down the debt,stop operating in budget deficit mode and we should have let the losers lose when the banks we in trouble. “divide the profits amongst yourselves (bankers) and socialize the losses.” the oldest trick in the book.

Posted by mike | Report as abusive
 

What is truly astonishing about the political storm building around the dollar’s weakness is that the currency has lost nearly 99% of its value over the past 100 years – including a 26% drop during the period 2001 – 2008 – and yet Obama and the Democrats are without question going to take all the blame for the fall of the currency.

This illustrates not only the continued commitment to utter political incompetence on the part of the Democratic party and an administration notable most for its bumbling of the basics, but also a press that has so completely bought the canard of “liberal media bias” that it falls all over itself to promote the right-wing agenda.

Neither Republicans nor Democrats care a whit about the dollar, or the country for that matter. Everyone in Congress is in it entirely for themselves and their contributors. America may not be the first, but it is certainly the largest country in which the oligarchy, having completely raided the treasury, have now decided to move beyond the borders to become citizens of the world. As for those of us left behind, well, one imagines we can eat cake.

Posted by Jack | Report as abusive
 

Highly unlikely. The chinese currency is undervalued by at least 20% by the Chinese to keep costs of their goods down and other countries buying. Everytime they let it float a bit it keeps going up, and up, and up…
When it unpegs, it’s going to increase, and suddenly all those chinese-made goods won’t be so cheap, and those jobs will start moving to other locations…back to closer countries, or cheaper countries. They are already starting to move into Africa for cheap labor.

==Bob D.

Posted by Bob | Report as abusive
 

IF THE DOLLAR DROPS OUR PRODUCTS ARE CHEAPER ON THE WORLD MARKET. IF WE ARE A GLOBAL ECONOMY THAT INCREASES OUR MARKET SHARE. WE SHOULD BE HAPPY THAT THIS IS THE CASE BUT NO, WE WORRY ABOUT EVERYTHING IN THIS COUNTRY AND WE TALK THE SUBJECT TO DEATH. WE NEED TO TAKE A DEEP BREATH GRAB A LITTLE GUTS AND GO GLOBAL… BUILD IT HERE WITH AMERICAN LABOR AND SELL IT TO THE WORLD. THIS DROP IN THE DOLLAR IS TELLING US TO INVEST AT HOME AND SELL IT TO THE WORLD THERE ARE 6.791 BILLION CUSTOMERS NOT 300 MILLION. GO GLOBAL! CHARLES BOWEN – CAPTAIN CAPS

Posted by CHARLES BOWEN | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/