The Dollar as a Dark-Horse Political Issue
When it comes to economic policy, a nation's currency is pretty much the ur-factor. But the political sharpies keep telling me that people don't care about the weak dollar, or at least that it doesn't have any legs as a political issue. I think they are dead wrong. People are beginning to understand how the anemic greenback is playing a role in high energy prices and inflation. Take a look at these poll results:
A Bloomberg/Los Angeles Times poll found that 76 percent of Americans think the government should do something to halt the falling dollar. Among those with incomes of $100,000 or more, 7 in 10 favored aiding the currency.... The U.S. currency has slumped 41 percent against the euro since 2002 and 13 percent in the past 12 months alone.
Tags: dollar | economy | politics
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Dollar
But what politician will be brave (or foolhardy) enough to tell those worried about the dollar's fall what will be necessary to arrest its decent? Our collective fiscal irresponsibility is so profound in both parties that it seems unimaginable that any of them will get religion. The tipping point may come when the dollar is abandoned as a reserve currency and various governments loose faith in our sovereign debt pushing interest rates meaningfully higher as the boomers start receiving Social Security and more importantly, Medicare benefits. It's going to be ugly.
Dollardrums
Most Americans don't realize that the weak dollar is acting like a sort of hidden tax on the average American. OPEC has recently suggested that the price of a barrel of oil could reach $200. Because the price of a barrel is calculated in dollars, Europe, China are actually paying much lower for their energy needs than we are. Even just a passive correction in the dollar's weakness, say to between 1.25 - 1.30 euros, would likely bring the cost of gas down at the pumps while still favoring U.S. manufacturing (the latter being the stated reason for a current dollar policy). This is a big issue that most people have failed to understand. I'm still waiting for one of the Democratic candidates to make the connection as there is political and practical gold to be mined with this issue.
Stimulating ourselves to death
The problem is that people think the solution to the weak dollar is more 'stimulus.' They don't understand that when the government stimulates the economy, it creates dollars out of thin air. As the supply of dollars goes up, the demand for each unit dollar goes down -- that is, inflation.
Thus, when the Federal Reserve gave $31 billion in "stimulus" to JP Morgan to purchase Bear Stearns, it was invisibly taxing everyone else $100 through inflation.
Until Americans understand that stimulus causes inflation, they're likely to embrace economic programs that will only make the dollar weaker still.
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