Wednesday, June 6, 2012

The Case for the Dollar: Nothing Has Changed

If one looks at a chart showing the value of the United States dollar against major currencies, one could argue that what was achieved in the presidency of Barack Obama looks very similar to what was achieved in the presidency of George W. Bush.  Both presidents created substantial amounts of credit inflation during their time in office and both presidents saw the value of the United States dollar decline against other major currencies in the world. 

The only thing that separates the two periods is the time in which there was a “flight to quality” in late 2008 and early 2009 and the value of the dollar rose.  However, as President Obama took charge the decline in the value of the dollar resumed.

The only thing that has made Mr. Obama look “good” over the past three years or so is the weakness in the value of the euro, a weakness derived by the fact that many countries in the eurozone followed an even more liberal policy of creating credit than did the United States and, as a consequence is paying the price for it.  

One can interpret the euro/dollar behavior as one in which both currencies are suffering from excessive government credit creation and one currency will seem to be stronger for a while and then the other currency will recover against it.  Right now, the dollar is showing stronger than the euro.

The point is, however, that overall, the value of the dollar is not doing real well against all the other major currencies excluding the euro.  This is a result of the fact that the economic policies of the Obama administration are little different from those that were pursued by the George W. Bush administration.  And, international investors continue to bet against the dollar…even as lots and lots of money pours into the United States from Europe because of the eurozone financial crisis. 

The international investment community shows little or no confidence that President Obama will turn the situation around in the future once the “flight” money reverses its flow.  Market forces sense weakness and move against it.  The Republicans are fighting the way they are, not because of Obama strength, but because of Obama’s weaknesses when it comes to economics.  They sensed this before the 2010 mid-term elections and politics in the United States has not been the same since.

There have only been two times since the dollar was floated on August 15, 1971 that the United States has really earned a “strong” dollar.  These two periods were connected with Paul Volcker, then Chairman of the Board of Governors of the Federal Reserve System in the early-to-middle 1980s, and with Robert Rubin, then Secretary of the United States Treasury in the last half of the 1990s. 

The rest of the time since 1961, the Federal government has focused on fostering credit inflation, using federal deficits to try and stimulate economic growth and keep unemployment at low levels.  What the government has actually accomplished over this time period, what we are experiencing now, is tepid economic growth, high levels of unemployment, and even higher levels of under-employment.

International investors recognize this and that is why the value of the dollar was floated back in 1971 and why the value of the dollar has declined ever since (with the exception of the two periods mentioned above).  Currently, the value of the dollar has declined by almost one-third of the value it traded at in the early 1970s.

I continue to believe that the value of the United States dollar will continue to decline against other major currencies.  Nothing has really changed…in aggregate.  Obama has created massive amounts of debt during his presidency.  George W. Bush created massive amounts of debt during his presidency.  And, unfortunately, I don’t really see much change coming along in the future. 

Therefore, I believe that the value of the United States dollar will continue to decline…along with the relative economic position of the United States in the world.    

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