Thoughts on a weak dollar…
Wednesday, April 30th, 2008At lunch the other day, a friend asked, “how does Bush’s weak dollar hurt the U.S.?”
Not an easy question to answer but here’s my shot at it:
Does Bush’s weak dollar hurt the U.S.?
The economists are clear on one thing - the increase in jobs from weak dollar advantaged exports offset the roughly comparable loss of jobs in domestic production. This first order analysis is correct but doesn’t take into account a huge structural advantage that the US enjoys and which a weak dollar undermines - oil is priced in dollars. (Yes, North Sea Light Brent Crude is priced in dollars and not pounds or kroner.) A non-trivial amount of the increase of oil prices is driven by the weakness in the dollar, ≈ 10+%. A huge threat to our well being is the threat of switching away from dollars. Our friends, the Iranians, are trying to start an oil bourse priced in euros. Because of our place as the world’s reserve currency, this is unlikely to succeed but it points to the strategic threat to our way of life. In a country which imports 60% of its oil and runs on the rapid, inexpensive transportation of goods, every increase in the cost of oil hurts our productivity.
Presuming you agree with the above that there is a real world effect due to a weak dollar on today’s economy, is Bush responsible for this weakness? Suffice to say that during John Snow’s tenure as Treasury Secretary, the Bush administration made an explicit decision to stop supporting a strong dollar policy. They chose to stop defending the dollar and now here we are with a weak dollar. So, Bush is responsible for a ‘not strong’ dollar but has he done anything to weaken the dollar? This is a more difficult question but there is a lot of circumstantial evidence that Bush administration policies contributed to a weak dollar. (Considering the competency deficit the Bush administration shows in almost everything it does, I am surprised that the below indicators are not stronger. This may be due to the Republican party recruiting leaders from finance and large business community.)
The strength of the dollar is measured against a basket of other currencies - yen, pounds, euros, etc. This value is set by a market mechanism of buying and selling dollars. A longer term value is set by the interest rates paid by borrowers in the US for foreign dollars. Currently, American interest rates are not attractive with respect to the other choices available in a global economy. Hence, the need to purchase dollars to loan to US businesses and consumers is down. The Bush administration via the Fed controls the floor of interest rates charged in the US. Here is a direct control mechanism. To stimulate the economy Bush is keeping interest rates low. Low interest rates reduce demand for the dollar. Why loan money for a low interest rate when you can get a better deal in another country? A weak dollar makes oil more expensive slowing the economy. Q.E.D. Bush has mismanaged the economy and is exacerbating it with a weak dollar policy.
In an indirect form, the Bush administration is prolonging the financial mess they allowed to develop over their 7 year tenure. By bailing out Bear Stearns, they are enabling a severe moral hazard to investment by Wall Street investment banks. This has further undermined the international opinion on the value of the dollar. The fact that we exported our junk subprime mortgages to investment banks around the world is hurting us.
Hence, I think there is an unequivocal argument that Bush has mismanaged the dollar and directly hurt US economic interests.
