Within a few days of Obama entering the White House, Tim Geithner stated that a strong dollar is in the best interest of our economy. The actions taken to date and some historical analysis of Obama’s chief economic advisor, Paul Volcker, would point at a policy of continued weakening of the U.S. currency. If the dollar continues it’s slide just an additional 5% it will be at be at an all-time low.
Today, the Wall Street Journal published an article stating that, “Pacific Rim government leaders will tell U.S. President Barack Obama about global concerns over the falling dollar and burgeoning U.S. debt at a summit this week..”. Their concerns are well founded and can be grouped together with those of the Chinese, European Union, Brazil and Canada.
One indicator of the Administration’s desire for an even-weaker dollar is it’s push to have China stop managing it’s currency and allow it to float. If that happens, the only possibility is a stronger yuan, and therefor a weaker dollar. Furthermore, on October 31st of this year, Obama said that the U.S. economy should be based even more on exports. In order for that to occur, our currency needs to greatly weaken against those of countries we have a large trade imbalance with.. like China.
A weak dollar isn’t all bad news as long as the decline is controlled, slow, and has a desired end-point. When the dollar weakens, international exports from America become less-expensive for others to buy. This increases foreign demand for American products. This only works when the American products don’t require components from other countries as those items are imports and will cost much more under a weakened U.S. currency.
One implication of a weak dollar is inflation. As the dollar weakens, so does it’s purchasing power. Imports become more expensive which will relieve downward-pressure on domestic products allowing those items to increase in price as well. The dollar is also how all trades in oil are transacted. As the dollar weakens, crude gets more expensive. Considering that petroleum is an input into so much of our economy (fuel for trains, trucks, planes, ingredient in plastics, rubber, etc), it hits Americans both directly in the gas tank and indirectly in stores, restaurants and vacation spots.
The last sustained depreciation of the dollar was during 1977 and 1978. There are some striking resemblances to that bleak period in U.S. economic history to today. We have a liberal Administration, we have hostages in Iran (I’m fairly certain that is not linked to the weak dollar), and Paul Volcker is back. During the late 70’s Volcker was the Federal Reserve chairman and directly orchestrated the dollar’s collapse – on purpose. Gas, groceries, imports and just about everything else got insanely expensive as double-digit inflation hit the pocketbooks of U.S. citizens.
We’ve seen a too-weak dollar before and it wasn’t pretty. Now we have some of the same people, trying the same thing, again.