James Pethokoukis

Politics and policy from inside Washington

The next big political issue? The U.S. 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. Then again, a devalued currency hasn’t exactly been a proven path to prosperity. (Ask Jimmy Carter.)

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

things are looking bad now, and obama still has his big ticket items in the wings. it looks to me like obama’s “fundamental changes” include starting with a blank canvas.
dennisintn

Posted by dennisintn | Report as abusive
 

I read your article because Google listed it under Dollar and currency problems, and I’ve never heard of you till now, but your writing seems kind of skewed.

TARP, Bernanke, the financial crisis, and the weak dollar are all Bush creations. Just cause he fled the scene of the accident, doesn’t make this Obama’s fault.

Now the misguide piece of political pork called the stimulus bill, you can blame on Obama and the Dems. But lets give credit (or in this case blame) where it belongs.

PS: Using Palin doesn’t help your credibility much either.

Posted by Bob Young | Report as abusive
 

“A weak currency arises from a weak economy which in turn is the result of a weak government” -– Gordon Brown.

Brown should have taken his own advice and Obama ignores it at his and America’s peril. Obama must protect our medium of exchange or he must be punished in 2010 and 2012.

Posted by Austrian School | Report as abusive
 

It looks like to me that Mr. Bob Young failed to understand the premise of this article. It was about the role of the strength of the dollar in the political arena. It did, however, give him the opportunity to turn it into a Palin bash.

Posted by Jay Maness | Report as abusive
 

Bob Young:

Quite the contrary, the Obama administration has continued the Bush Administration’s disaster policies and has accelerated the weak dollar.

Unfortunately, the Obama administration’s fiscal/monetary policy miscalculations (and I might add Pres. Obama’s recent support for renewing Bernanke’s continued chairmanship of the Federal Reserve) illustrates “faulty” decision-making by the Obama executive branch.

PS:
The author reliance upon Gov. Palin’s analysis of this issue is highly appropriate, and economically speaking, on target.

Posted by Western | Report as abusive
 

Western: You will get no argument from me about obama = bush. This seems more like bush’s third third term, than the first year of a new president. Obama has been a huge disappointment, because he has continued Bush’s policies.

But that doesn’t change the fact that the article seems quite partisan. An attempt to wordsmith something for the party faithful, to make it look like dems are the source of all evil.

My personal view is that we no longer have to parties. Just two puppets controlled by wall-street.

So for those who normally frequent this forum/echo chamber: Have a nice day, I’m out of here.

Posted by Bob Young | Report as abusive
 

Obama’s polices of massive corrupt spending, massive debt, and printed money are indeed destroying the value of the dollar. When Obama’s massive taxes kick in and slug the ecomomy the permanent slow down in growth will also further weaken the dollar. Instead of making economic and job growth his priorities Obama is making global warming—cap & trade, and income redistribution his priorities. Unless something happens to interrup Obama’s plans the U.S. and the dollar are headed to 2nd rate has been status!

Posted by valwayne | Report as abusive
 

Amen. Weakened dollar = weakened U.S.

And I love that Sarah Palin always seems to be a step ahead of the hottest political debates. Dare I say, she’s leading the debates? From her Facebook page?

No, no, no … to the Bob Youngs of the world, we can’t have a woman with common sense involved in important political dialogue. Let’s keep listening to and electing Ivy League economic flunkies who’ve never successfully run a Twinkie stand much less guided the world’s largest economy.

At the rate we’re going, the dollar will be so worthless, Obama will have to solicit twice the amount of overseas illegal contributions for his re-election bid.

Posted by Nicole | Report as abusive
 

You said it all for me Nicole.Way to go if you were hear I would offer you a big hug.So many of us are waking up to the facts.I went to Palins page and read all her notes.Slay the death tax,kill capital gains reduce payroll taxes,cut corperate tax,riegn in spending like she has done in her state.Her HC notes make sense,so does her energy independence notes.I sure do hope she runs for POTUS in 2012.America would roar back to economic life,if people actually listened to her in DC.However listening is their problem,they talk but never listen.

Posted by David | Report as abusive
 

It’s interesting to watch how many dems are prepared to defend this spending and even demand more by stressing it’s the right thing to do. Even if it were, and i doubt it, do they ever consider there might be an end to credit and spending, no matter how justified some might consider it? Sooner or later the prospect of a debt wall will stop this. Let’s hope it doesn’t take a crisis to realize this, although, as an earlier poster mentioned, it might be obozo’s attempt to begin with a blank – and bleak – canvas. He’ll still be affluent, others will be more dependent on big government and his liberal pals can claim captalism has been destroyed.

Posted by biff jupiter | Report as abusive
 

Where was Pethokoukis when Bush was destroying the dollar?

Oh, he was asking “Dude, where´s my recession”!

 

Bush was bad and Obama is worse so now what do we do

Posted by Waldob | Report as abusive
 

How about we kill the Fed and go back to real money. Some how I can’t see why anyone believes the Fed is managing the money supply, when they have “managed” to destroy 95% of it’s value since 1913.

I think the system must be immoral that steals 52% of my folks fixed income pension over the last 25 years.

Posted by Joel Johnson | Report as abusive
 

Let me try to be apolitical. Already the dollar is falling fast. That means it takes more of them to buy any and all imports. The USA imports on a dollar basis far, far more today than the last great inflation in 1980 so it will impact the inflation rate and cause it to rise almost immediately.
If a falling dollar becomes a long term trend, then the US will have accelerating inflation and there is no way around it. What goes up in price? Everything from underwear(imported from everywhere) to energy since the USA discourages domestic supplies. It also will force interest rates to rise as banks take more money from all of us since the value of their assets drop the longer they lend to us. High enough to choke off a recovery? We’ll see.

The last time we had a great inflation, launched by Jimmy Carter, it was 1979-1980 with the inflation rate varying from 10% 13% over that two year span. For those that remember that was a miserable time with daily price hikes.
Ronald Reagan killed inflation by shutting down the growth of new money, keeping interest rates high, tax cuts and slowing federal spending. That process caused a sharp recession before the economy became healthy enough to expand a couple years later.
In short inflation is a bear to kill. So anyone calling attention to the dangers of high inflation is speaking truth to power and should not be ignored. Regardless of race, gender or national origin.

Posted by richardb | Report as abusive
 

Jimmy, the next, next political issue that will nail the economy is the enormous liability taxpayers are carrying for defined benefit pension plans for retiring public sector employees. The answer seems to be taking on more and more risk to make up the short fall. Disaster.

Posted by EconRob | Report as abusive
 

Does it really matter? On all the political issues, Obama is going nowhere fast.

He is either continuing the status quo because he has nothing better, or because he too afraid to reform something alone and risk a backlash if he fails.

The question on many Americans lips is this:

“How much more time should we give him before we start getting angry we voted for him?”

Posted by Hmmm | Report as abusive
 

The dollar cannot be truly weak. It can have a lower exchange rate, it can be pulled out of the laundry, but its strength is imbued in its vehicular nature. Foreign central banks worldwide cherish the dollar. This adds strength. They hold the dollar not only as cash but as long term securities. This also adds strength in the time domain. US multinationals dominate global market share, and their operations at some point will use the dollar creating a demand for the dollar in the private external market. But, as one economist says to another, who care’s “why” the dollar, are there really any alternatives? Please don’t say the Amero.

 

Not that I am an Obama fan by any means, but Bush-Greenspan decimated the dollar for eight years. Now it’s suddenly a problem? Republicans have to look seriously, if not at the man himself, then the ideas of Ron Paul, the only one who has been attentive to these problems early on.

Posted by iGGY | Report as abusive
 

It’s all in the big plan. Devalue the dollar so that all of the U.S. debt can be paid back with worthless dollars. On the surface it looks good but it also means a very sharp reduction in the standard of living for most average Americans. There are certain laws of economics that can not be violated. You can pay for out of control Government spending with high taxes or, in the case of the United States, you can pay for it with hyper-inflation. The political cowards in Washington D.C. have chosen hyper-inflation.

Posted by Brad_Splitt | Report as abusive
 

It is a sign of economic ignorance that an article on the dollar could not make a single reference to the enormous trade deficit this country has been running for over a decade. It is simply impossible for the dollar to remain at current levels while we import billions more than we export.

A high dollar and high trade deficits cannot be reconciled, and since the American Consumer cares little where a product is made, a lower dollar is inevitable.

Posted by Bill Dan | Report as abusive
 

richardb (8:00PM): I don’t think you did a very good job of being non-partisan. “The last time we had a great inflation, launched by Jimmy Carter, it was 1979-1980 with the inflation rate varying from 10% 13% over that two year span. For those that remember that was a miserable time with daily price hikes.
Ronald Reagan killed inflation by shutting down the growth of new money, keeping interest rates high, tax cuts and slowing federal spending.”

The inflation was launched by an “oil shock” whose cause was surely not as simple as “Jimmy Carter”, and it was Carter’s appointee Paul Volcker who led the tight money attack against inflation. Tax cuts don’t particularly fight inflation and Reagan didn’t slow federal spending, he just shifted it from domestic programs into a military buildup.

A lot of Republicans are in full amnesia about the situation President Obama inherited.

Posted by mike | Report as abusive
 

Sarah Palin is on it. Barry’s brain is gone.

The Chinese literally laughed the Obama/Geithner economic plan off the stage in Beijing last Spring.

The Chinese, and rest of world, are now lined up to ditch the dollar. Just the threat can make it crash… nobody will want to be holding it.

If the dollar crashes 50%, it’s an instant 50% rip-off of everything you own in a US bank account.

Gas at the pump will instantly go from 2.50 per gallon to $3.75+.

How’s that for “economic and social justice”?

Obama needs to sell Pelosi’s jet on e-Bay and make other massive cuts pronto, instead of printing more monopoly money….. of money, the messiah knows not.

Posted by jibjabber | Report as abusive
 

I remember reading the articles by Steve Forbes pleading with Bush to defend the dollar. I am now reading articles by Steve Forbes pleading with Obama to defend the Dollar.

The logic is the same as in the Weimar Republic, all inflation to make it easier to pay down your fixed obligations. It is like your mortgage, a fixed amount at a fixed date, but your salary rises over time allowing you to pay off your fixed obligation with more money. The mortgage company knows this and builds it into your interest rate, so while it feels like it is working, the mortgage company is compensated anyway.

It feels like it is working because the government is giving me services and justice while you pay the bill. The problem comes with the inflation, caused by the weakness in the dollar, caused by the printing of money, caused by…

In the end, WE LOSE as it costs us more to buy food and shelter, the economy slows as companies invest their money overseas in lower inflation environments, taking jobs that would have gone to you and me to someone not in the USA.

It seems that the only guy with the courage to face this challenge was Ronald Reagan. Love him or not, one must admit he put in policies to reverse inflation.

Bush and Obama, both have made the same strategic mistake for different reasons. We will pay.

Posted by Geoff | Report as abusive
 

Mike, the price of oil in the late 70′s wasn’t the only cause of inflation. In fact inflation adjusted oil in 1980 was $98/bbl a 33% increase over 1979. In 2008, it was $91/bbl a 38% increase over 2007. Yet 2008 had little inflation whereas 1980 had very high inflation. So there are other factors.

Carter did cause the great inflation by keeping interest rates low thereby encouraging too high monetary growth. His screwy wage and price controls didn’t help either. Inflation was gathering strength all during the Carter presidency.
Then the oil shocks hit. If memory serves me well, the oil shocks where caused by turmoil in Iran, when Carter cut the legs off the Shah and the mad mullahs took power, sacked our embassy and took our diplomats prisoner. I believe Carter bears some responsibility for the chaos in the gulf that caused oil to spike. Another factor for oil price hikes was the Soviet invasion of Afghanistan. More tension and themes applicable to today with Obama.
People blame a president for events on their watch. Bush deserves the blame for the financial panic of 2008. Carter deserves the blame for the great inflation on his watch.
As for now, we are witnessing a growth in public debt unprecedented in human history. So large that it will be far greater than our GDP, so large that it will soon consume 50% of all federal spending. In a sense with US government bonds having 0% interest, we are in a time of “free money” for the USG. The longer this goes on the sooner the dollar’s fall becomes a free fall and inflation becomes ingrained in our economy.

Posted by richardb | Report as abusive
 

I think these guys keep missing half of the story. The dollar’s reserve currency status is not only a function of its relative value (currency exchange rate), rather it is also a function of our geopolitical strength which enables the US to intervene whenever we foresee strategic threats to the world oil supply (specifically to our oil producing “cartel” members who facilitate oils denomination in dollars to our benefit). Once importing countries (of all goods i.e. China) no longer reserve dollars AND no longer fear spending our dollars in their local economies, which would normally inflate local currencies, they will have little need to reinvest our dollars back into our own (US) economy (i.e. TBonds). This will starve our capital markets and kill US businesses. IF YOU WANT A STRONG DOLLAR, YOU NEED A STRONG USA (Economically and Militarily).

Posted by IBanker | Report as abusive
 

I blogged about an article I read on a National Association of Business Economists survey of leading economists about the current recession. The article was a reguritation of the NABE press release, but I tried to look deeper into potential problems with the recovery. I also saw a weakening dollar as an impediment to recovery. (Yes, the weakening dollar definitely has bipartisan roots.)

 

Where was Pethokoukis when Bush was destroying the dollar?

Oh, he was asking “Dude, where´s my recession”!

When is the expiration date for lefties whining about Bush? Of course that would require taking responsibility which they are fundamentally incapable of.

Posted by bandit | Report as abusive
 

The appeal of Palin is only partly that she is not Obama. It is also partly that she is not Bush. One of the problems for Romney in 2012 will be that he seems to be just another Bush-like candidate. The people who hate Palin love or loved Obama. If he crashes and burns (and crashes and burns the economy), why should we trust their analysis of candidates? In forty years plus of watching politics, I have never seen an administration get off to as disastrous a start as this one has.

Posted by nohype | Report as abusive
 

Bill Dan,

Actually, the trade deficit is a result of the dollar’s use as a reserve currency. As long as the dollar is the primary global reserve currency and the global economy is growing, the US HAS to run a trade deficit, otherwise other countries cannot accumulate dollars in their reserves. It would be the same if gold was the global reserve currency and the US had the only gold mines – the US would have to be a net exporter of gold no matter what else was happening with trade.

Unfortunately for the US, this necessary outflow of dollars has created a political culture that feeds off it. If the dollar starts to decline as a reserve currency and the money starts to flow back to the US not only will the US have to deal with the economic shocks related to the resulting devaluation, but Congress will have to face the fact that they can no longer use the old dollar outflows to fund the deficit.

In reality, if the US starts to run a trade surplus, it will be a clear sign that the dollar’s status as the global reserve currency is coming to an end. If that happens, expect to see a lot of cheering about trade surpluses, combined with a massive Federal budget crisis.

Posted by phwest | Report as abusive
 

Build about 100 nuclear power plants. That would create tens of thousands of new jobs and cut the trade deficit, strengthening the dollar.

 

I think funding for rejuvenation will become a major issue within the next 10 years as people begin to realize that a comprehensive cure for aging is the only realistic choice to avoid the massive bankruptcy and economic depression caused by the need to support the medical expenses of the old.

 

The USA seems to be a sinking ship and it also seems to deserve this.
How about this good ‘ol boys: Live within your f@cking means ?

Posted by Matthew | Report as abusive
 

“‘The inflation was launched by an “oil shock” whose cause was surely not as simple as “Jimmy Carter”, and it was Carter’s appointee Paul Volcker who led the tight money attack against inflation. Tax cuts don’t particularly fight inflation and Reagan didn’t slow federal spending, he just shifted it from domestic programs into a military buildup.”"

Inflation was rising well before the Oct 1973 oil shock. The oil shock made it worse but by Aug 1973, CPI had risen 8.5% from the previous 12 months(SOURCE BLS). Oil shock sent it to 14% by March 1974. Likewise the Iranian revolution and second oil shock was Jan 1979 but by the end of 1978 CPI had risen over 8% in the previous 12 months up from 6% in 1977.

The printing of money not the oil shocks were the primary cause of 1970s inflation. The oil shocks were just the icing on the cake.

THE FED WILL NOT reduce liquidity enough to avoid another bout of inflation. Bernanke does not want to be like Greenspan in 1992 and get the blame for Obama’s defeat.

Posted by Emo | Report as abusive
 

a cheap dollar will not reduce the trade deficit. We will import fewer Kia’s but the dollar cost of oil will increase. Also as commodities increase that will offset some if not most of the benefit to exports from a weaker dollar. Not to mention that many manufacturers use foreign parts in their products. Was just at a Dodge dealer today. The Challenger is built in Brampton, ON. So as the CDN approaches parity with the USD, that Challenger will become more expensive or Chrysler will have to take a loss. So much for the weak dollar.

Posted by Emo | Report as abusive
 

Unfunded public employee pension benefits is the next big political issue.

Posted by EconRob | Report as abusive
 

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