Who lost the dollar?

October 12, 2009

James Pethokoukis — James Pethokoukis is a Reuters columnist. The views expressed are his own —

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?”


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It’s crazy that people can’t grasp that the low interest rates currently needed to stimulate investment are exactly what is pushing the value of the dollar down. Just for fun, why doesn’t the Fed raise rates a quarter point and see what happens to the dollar! Be patient people! (P.S. I’m a currency trader).

Posted by NoName | Report as abusive

The dollar’s weakening, and the possibility it may spiral catastrophically out of control, is hardly a new issue. It is the inevitably result of decades of political and economic decision making – or perhaps one might more accurately say avoidance-of-responsible-decision-making  , and has been a bipartisan, indeed a society-wide process.

There will, of course, be the customary political gamesmanship with respect to the issue.

That squalid process aside, the best that might be hoped for is to manage the process of devaluation intelligently – unlikely though such management may be.

The reality is that decades of accumulated unsustainable debt will, one way or another, be written down.

The devaluation of the dollar and accompanying inflation are the principal elements of that process of real debt reduction.

The US ran up the bills over many decades of irresponsible behavior, mismanagement, delusion, and self-indulgence – hardly new in human affairs.

Now the bill comes due.

Posted by Not Silent Not Bob Either | Report as abusive

What a moronic article. The dollar was always underpinned by military power. Now after the communicidal reign of George Bush and Dick Cheney and their brain-dead legions, the actual value underpinning the dollar (the wealth-building productivity of U.S. citizens built up over centuries) has been delivered into the hands of the speculators and the vulture-corporatists.

Those bailouts went to pay bogus bonuses to the top tier of the pirate capitalists. What a joke to say it is Obama’s problem. Those in both the Democrat and Republican parties who have supported the move to oligarchy and vulture-corporatism are politically culpable. We have been sold out to the highest bidder and now we are being farmed and rendered like so many cattle.

The dollar will get exactly what it deserves. Double the dollars in circulation and you will ultimately halve the value. Thanks, Bernanke, Geitner, Summers, Bush, Paulson, Cheney, Pelosi, et al.

Posted by Jonathan Cole | Report as abusive

We are over-extended – over sexed – dim-witted, lazy and addicted to something….If it isn’t one thing – it’s another….
It is easier to “market” chinese stuff than make our own – easier to “fake-it” than get a real degree in a science!
Basically it is the last thirty years of: lying-cheating-stealing! (and now we are going to “blame Obama”) ???

Posted by ray brooks | Report as abusive

Note to Reuters: moderated blogs are useless, never get much action, and always fail in the end.

We police ourselves, thanks.

Posted by mark godfrey | Report as abusive

From what I remember about 9 or so months ago, bush/cheney pushed the stimulus and the TARP but congress did the legal part. I guess it had something to do with the trillion or so we wasted in Iraq and Afghanistan, not to mention the almost 5,000 US lives lost- not to mention the destroyed lives in those countries.

Didn’t hear conservatives bitching back then.

Finally, anyone with half a brain can point out problems, what is Mr. Pethokoukis’ solution?

Posted by BOBBYG | Report as abusive

Nice article, James, in which you address both sides of the weak dollar argument. In reading the posts, I find it interesting that some here like to shove blame completely over to the Republicans for the mess that we’re currently in, without holding the Obama Admin accountable for the further reckless spending that THEY are now responsible for. Yes, the Bush Admin was just as wreckless, but no one should give the current President a free pass either. Truth is, our elected officials from both major parties keep playing us against one another to get themselves reelected and to maintain their own party’s advantage. Until we all stand up together and demand that the Fed government stop spending money it doesn’t have, the nation will remain on its current path to economic disaster.

Posted by Leo | Report as abusive

We independent conservatives have watched both major parties pass entitlements with out sunshine reviews for the past 50 years. Now we are all reaping the consequences. The only solution is an honest balanced budget that includes the entitlements. It will be hard to wean the pork barrelers from their crony reward system but unless we “throw the bums out’ and elect fiscal conservatives we will see economic chaos and hardships that will make the great depression look like the ‘good old days’.

Posted by D White | Report as abusive

Well informed blog, interesting. I like this site. Just to let you know what I see is inflation and the smart money managers moving their funds to combat it. Grocery store prices on normal items have all went up fifteen cents so that corporations can recoup their losses. And the treasury will be printing money to cover all the debt the country has incurred and will continue to incur.
The dollar will be worth less. The only bright spot I see happens to be in the fact that the cost of producing goods overseas will increase because of fuel cost, low currency value, and higher wages for overseas workers, hopefully to the point that it will become cheaper to produce products in the United States again. If the money keeps flowing out of this country and the debt keeps adding up we will eventually be broke and suffer a recession in spite of the bailouts.

Posted by Rachel | Report as abusive