James Pethokoukis

Politics and policy from inside Washington

A stronger dollar on the way?

Oct 16, 2009 12:07 UTC

The conclusion from this interesting VoxEU piece:

In short, in contrast with growing dollar scepticism and even though US external accounts continue to point to dollar weakness despite the recent correction, the fast rebound of the US economy and the undoing of the monetary stimulus may deliver higher rates in lieu of a weaker dollar in 2010.


“Fast rebound” of the US economy? What green shoots are they smoking? Foreclosures up, jobs being lost left and right, higher regulation, higher taxes, etc. Where’s the growth going to come from? The over-burdened consumer buying more foreign produced stuff?

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The bull case on the dollar

Oct 13, 2009 11:30 UTC

Scott Grannis, the Calafia Pundit, plots a currency course that does’t turn America into a third-world economy:

Modestly good news, such as an early move by the Fed to raise interest rates even by a little bit, or news which shows the economy is likely to simply avoid a double-dip recession, or news which indicates just the tiniest rightward shift in fiscal policy, might be enough to push the dollar higher.

It’s hard to fight the tape on this, but I continue to believe that the long-run prospects for the dollar are favorable. I think the economy is doing better than most give it credit for, I think the Fed is going to move sooner than most expect, and I think that policies in Washington are going to turn out to be less awful than the market fears. I’m not saying that everything is going to turn rosy, merely that I don’t see things getting worse forever.

Me: Maybe, but this sounds like a 2011 story, not 2009 or 2010.


I disagree, 2011 may be the point the dollar begins to bottom out but not look to a bullish run – interest rates will be just high enough by then to continue unhindered to borrow the vast sums needed to repay the Chinese.

But I can see U/E coupled with underemployment maxxed at 20% through 2011. Greatest fear – rates have to be ratcheted soo high to get investors attention. No “U”, “V” or “W” – this will look like a nasty “L”.

The world has talked about the uncoupling for years, looks like that will include debt. The US will not appreciate the end result. We could barely take 6 months of $4/gal gas; can we stomach an astronomical interest repayment?

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The next big political issue? The U.S. dollar

Oct 12, 2009 18:22 UTC

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?”


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

Posted by EconRob | Report as abusive

Will Bernanke save the dollar like Volcker did?

Oct 9, 2009 13:49 UTC

David Goldman over at the Inner Workings blog, notes a key anniversary:

Inflation had crossed into double digits after four years of mismanagement by the Carter administration. The gold price was rising (and about to hit an all-time record when the Soviet Union invaded Afghanistan the following Christmas). America’s international position had collapsed; the European elites believed that America would lose the Cold War; America was in deep recession even while inflation soar. Volcker had no choice but to raise the federal funds rate to 15%. The dollar stabilized but the US economy went into free fall.

The San Francisco Fed reported, “Volcker returned from the annual IMF meetings in Belgrade in early October “with his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness on exchange markets. Volcker decided to call a special meeting of the FOMC, a meeting that was not publicly announced, to be held on Saturday, October 6.”

Are we due for a repeat of the Oct. 6 tightening? Not a chance for the time being. No-one wants it, least of all the Chinese — which is why they continue to buy US Treasury debt, albeit at a much reduced rate. But unless the Obama administration finds some way to stop monetizing debt, something like this has to happen.

How to get a strong dollar

Oct 8, 2009 16:56 UTC

The enlightening David Malpass in the WSJ:

Measured in euros (a more stable ruler than the ever-weakening dollar), U.S. real per capita GDP is down 25% since 2000, while Germany’s is up 4% and tops ours. The solution is a strong U.S. jobs and wealth program. It has to include stable money, a flatter, more competitive tax structure, spending restraint, and common-sense bank regulation so small business lending can restart. Treasury has to rapidly lengthen the maturity of the national debt and take steps to protect the Fed from market losses on its long-term debt holdings.

Me: Absolutely. Don’t worry about the dollar per se, just put in place policies that keep inflation low and productivity high. While Team Obama likes the weak dollar (though Congress is getting worried), the chances of a sharp dollar tumble are rising and will force it to reduce the deficit soon than it would prefer.

More on the erosion of dollar dominance

Oct 7, 2009 13:44 UTC

Justin Fox of Time echoes my thoughts on the dollar, that its currency dominance has enabled massive deficit spending by the United States:

The U.S. economy’s share of global economic output has been declining and will almost certainly continue to decline as formerly poor countries get richer. With that, the dollar’s role will need to change.

Such a change wouldn’t be unmitigated bad news for Americans. As I’ve written before, having the dollar as the world’s currency has been a mixed blessing. The dollar’s global role inflates its value, for example, which makes imports cheaper for consumers here but also makes U.S products less competitive globally. Dollar supremacy also allows the U.S. government (and until recently the private sector) to get away with wildly unbalanced budgets without paying an immediate penalty in higher interest rates, which can be nice for a while but tends to end in trouble. The global capital-flow imbalances that many economists now say were at the root of the financial crisis are in significant part a product of the dollar’s outsized role.

All of this means that it may well be in the long-run best interest of the U.S. to push for an orderly transition away from the current dollar-based global monetary system and toward one built around currency baskets, the International Monetary Fund’s special drawing rights, the bancor, gold or whatever other measure of value we can all agree on. In other words, it’s not the worst news in the world that the Persian Gulf countries are talking about moving away from the dollar. Even if they say they aren’t.

Me: Again, keep inflation low, productivity high and deficits narrow — and let the dollar worry about itself. How am I wrong on this? And Simon Johnson explains why the White House likes the current dollar decline — as long as inflation stays low:

This may, of course, turn out to be a miscalculation, but think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.


Sure, we’ve mis-used the opportunity of the dollar being a reserve currency. Instead of investing in our future and saving as a country, we spent, spent, spent.

Trying to find a silver lining to a long-term decline in the Dollar is a bit premature though. Our economy – heavy reliance on imported goods, weak manufacturing base, high reliance on foreign oil, and huge budget deficits to fund – would leave us overly-exposed to a rapid Dollar decline. You want to experience $150 oil again? How about hyper-inflation in all the wrong places – food, industrial imputs like copper, and stagnation in wages for the vast majority of the economy. Oh, and a spike in interest rates to 6, 7, 8+ – what does that do to our interest burdens as families and governments (state and local). It could all create an accelerating feedback loop to the downside.

We should be preparing for the inevitable shift away from the Dollar as a reserve – but we’re not…

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Is dollar supremacy a false economic god?

Oct 6, 2009 20:23 UTC

Lots of folks are in a tizzy about this report of an Arab-Russian-French-Chinese plot (sounds like a typical episode of 24) to stop using the dollar in oil trading. Add to this a) the already declining dollar, b) the rise in gold and c) the recent speech by Robert Zoellick where he warned about dollar threats and you have d) visions of a dollar apocalypse and the end of America as we know it.

But so what. The goal of American economic policy should be to produce an economy that is a)  innovative and productive economy, b)  where standards of living are rising, c) where is inflation is low and d) supports a fiscally sound government. Do that, I would think, and your currency will take care of itself, yes? And when you add to that the reality that dollar supremacy has enabled Uncle Sam to run massive budget deficits, a more multipolar currency world doesn’t sound half bad.


Wow, you’re finally saying something that I can fully agree with. I’m a little scared… I bet I’ll feel back to normal once I read your next entry though.

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Obama, the Un-Reagan when it comes to the dollar and stocks

Oct 2, 2009 19:12 UTC
David Goldman notices the tight relationship of the dollar and the stock market, comparing it to the Reagan years.
We have only had one period in which the dollar and the stock market were so correlated, and that is in 1983-1984, the beginning of the great Reagan stock market rally. The world bought the dollar and sold the US economy, before the Mundell twist (tight money and lower marginal tax rates) kicked in and the Reagan recovery began. Now we have the opposite: The dollar is selling off in tight correlation with rising stock prices, again with rising stock prices.
Think of Obama as the un-Reagan: rather than a monetary squeeze hurting stocks, monetary easy is helping stocks, as the world goes to the great American fire sale assets. We’ve had an un-rally, and now it’s going undone. … This is a unique situation: never before has the US stock market traded as if it were a banana-republic equity market reprices to the dollar. Now the stock market is repricing to a basket of alternatives to the dollar. That doesn’t spell the end of the dollar as a reserve currency, at least not for the foreseeable future. As former Fed chairman Paul Volcker told Charlie Rose last night, there’s no alternative to the dollar. Bt that’s for now. Keep it up, and the world will eventually find a substitute for the dollar.

Wake up America,

your president is doing a photo op with DAVID LETTERMAN,

and EVERY NEWS CHANNEL for another photo op,

and now hes in Copenhagen to run for the Olympics with OPRAH WINFREY.

Lost the Olympic bid, spent 3 million of YOUR MONEY.


Not for me thank you very much!

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Should America embrace a weaker dollar?

Sep 24, 2009 17:12 UTC

Does Ben Bernanke care about the dollar? Larry Kudlow doesn’t think so:

Today’s FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn’t care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month’s reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation. … The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today’s incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben. Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That’s gonna wait well into next year.

And guess what? The White House might not care much either, so says Tom Barnett:

The long-term slide of the dollar is certainly helping, as is the fact that Asia, Europe, and America all seem to be recovering at roughly the same pace. Ideally, the U.S. will use this ongoing “framework” dynamic to accelerate China’s movement toward de-pegging its currency from the dollar and making it fully convertible, thus accelerating the dollar’s own decline as the global reserve currency. Over the long term, a dollar that can be balanced by a combination of the Euro and Chinese yuan (or some “Asia” basket that combines the value of the yuan, Korea’s won, India’s rupee, and Japan’s yen) is a dollar that cannot get too out of whack from its true value — as in, too fiscally undisciplined back home.

Obama’s framework proposal does truly represent a tipping point in global affairs: a financially humbled America committing itself to abide by IMF counseling in order to keep the trade peace among the world’s biggest economies. His critics will undoubtedly cast this as a humiliating capitulation to “foreign interests,” and these politically potent charges will force the president into all manner of showy protectionist displays. But the larger point is this: By submitting to the collective judgment of globalization’s “board of directors,” America finally admits that its self-styled international liberal trade order has blossomed beyond our control.


Your are opinion is totally useless. It does not provide a guideline into make money in the stock market. You are more like a professor than a truly investor. If someone gives you their savings, you will soon loss it all.

The worrisome relationship between a strong stock market and a weak dollar

Aug 26, 2009 18:22 UTC

The dollar drops and stock rise. If the dollar is supposed to be a reflection of economic strength, this should tend not to happen.  David Goldman find this weird, too — and then explains it:

Something ominous is at work here. Typically, a stronger dollar goes together with a stronger stock market. That is what we observe prior to the bank bailout last fall. Starting in the third quarter of 2008 and going to the present, the correlation turns sharply and persistently negative. A cheaper dollar means higher stock prices, as US assets are marked down for global investors.

What we have is not a stock market rally but an adjustment to global market prices. Fully 80% of the movement in the S&P can be explained by the movement in the dollar index.

That is a profile well known to emerging market investors. Whenever the Brazilians would pull another currency devaluation, stock prices rose to compensate, as tradeable assets floated up to world market prices. The bank bailout has made Americans poorer relative to the rest of the world and created the illusion of a stock market recovery.

That does not necessarily mean that inflation will return to the US, as some analysts believe. Foreign investors are not likely to buy homes in Cleveland (although the dollar devaluation certainly should help real estate prices in New York or San Francisco). And the combination of high unemployment and deferred retirement (greeter jobs at Wal-Mart will be in great demand) will keep wages down. The price of international tradeables, though, will affect US inflation, which is why I continue to recommend classic commodity hedges (including gold and oil) rather than TIPS.