Donald Trump’s dollar
A weak dollar won’t make America great again
President Donald Trump’s assertion this week that the “dollar is getting too strong” led to a sharp decline in the value of the greenback. The market’s reaction to Mr. Trump was a reminder that presidents often get the dollar they want. This has us worried Mr. Trump and his Treasury department will pursue a weaker currency in the mistaken belief that this will boost the economy and his presidency.
The irony here is that the anticipation of many of his other policies, such as his proposed tax cuts, deregulation plans, and Obamacare reform, have already strengthened the dollar since the election, because those policies would make the U.S. a more attractive destination for investment. Mr. Trump was partly right when he noted the irony that his policies are partly responsible for the higher dollar that he doesn’t want.
Here’s what he seems not to get: the investment here in new factories and businesses won’t be as great — and job creation won’t be as robust — if he gets his way and the dollar is weakened or unstable. Investors want to send their money to places where the currencies don’t erode in value and thus reduce the real return on their investments.
For evidence of this, consider history. Strong dollar presidents have been economically successful and weak dollar presidents have been mostly unsuccessful and unpopular. Correlation is not causation, but it is instructive.
Start with the economic boom in the 1960s that began with John F. Kennedy. Real growth rates hit 5 and 6 percent. Kennedy laid the groundwork by rejecting an emerging and wrong-headed consensus that a weaker dollar free of its golden anchor would enhance economic growth. Kennedy’s declaration on the dollar was bullish and unequivocal: “This nation will maintain the dollar as good as gold at
Strong dollar presidents have been economically successful and weak dollar presidents have been mostly unsuccessful and unpopular. Correlation is not causation, but it is instructive.
$35 an ounce, the foundation stone of the free world’s trade and payments system.”
Under President Richard Nixon confidence in the dollar eroded. In 1971, Mr. Nixon made dollar devaluation explicit when he severed its link to gold. The consequence of this action was a greenback that went into freefall. This was the start of the great inflation of the 1970s with surging gold, oil and commodity prices across the board. Under Jimmy Carter the weak dollar policy became more pronounced with Treasury Secretary Michael Blumenthal publicly urging a weaker dollar. And weak it became as inflation eventually topped 13 percent.
It’s surely no surprise that we had three failed presidencies in a row: Richard Nixon, Gerald Ford and Jimmy Carter. The battered dollar meant that real living standards took a big hit — especially for the poor and middle classes — and the stock market got crushed. Stocks lost more than half their value adjusted for inflation in the worst bear market since the Great Depression. The price of gold surged from $35 to $875 during a rather forgettable economic decade.
Ronald Reagan’s policies changed all that. Much historical credit for the economic boom of the 1980s is attributed to the 40th president’s tax cuts and deregulation, but we think that just as importent was Mr. Reagan’s quest to crush inflation and his frequently expressed desire for a stronger, more stable dollar. Paired with the aforementioned tax cuts and deregulation, the U.S. proved a magnet for investment in the ’80s.
Bill Clinton’s presidency was a repeat, and arguably an enhancement on Mr. Reagan’s strong dollar. Mr. Clinton’s Treasury secretary Robert Rubin never bashed the Japanese over the value of the yen, and his currency quietude was a strong signal that he meant what he said about a strong dollar being in our best interest.
Unfortunately, George W. Bush reverted to a weak dollar policy when he reached the White House in 2001. Gold, the best measure of a currency’s value, had been largely stable in price in the prosperous ’80s and ’90s only for it to more than triple against the dollar. Another weak dollar era began, and with predictable results: subpar economic growth and a crash.
The dollar’s sharp decline continued throughout much of Barack Obama’s first term in office, though his administration eventually and wisely retreated from currency brinkmanship. By 2011 the dollar began a long march upward, and the gold price began a gradual decline. The latter gave legs to what had been a steady stock-market rally. While we disagreed with President Obama on most of his fiscal and regulatory policies, his dollar policy was a winner.
The weak dollar advocates in the Trump White House seem to forget that American workers are paid in dollars in return for their toil. But if the dollar falls as Mr. Trump says he desires, the purchasing power of American paychecks will shrink with the devaluation. How does it help the 150 million Americans earning a paycheck for the government to adopt a policy that reduces each dollar’s purchasing power to, say, 95 cents. This is an effective pay cut for the tens of millions of working class Americans who crossed over and voted for Mr. Trump.
If Mr. Trump wants to implement policies that boost prosperity, he should focus on tax cuts, deregulation, and a strong and stable dollar. Those are the policies that worked for the three most economically successful presidents of modern times: JFK, Ronald Reagan, and Bill Clinton. A strong, not a weak, dollar makes for a strong and popular president.