Individuals who have read my posts for any period of time know that I agree with former Fed Chairman Paul Volcker that the most important price for a country is the value of its currency.
The value of a country's currency provides a market grade of the country's economic leadership and policy making. It judges actions and not speeches. It determines whether you are just talking the talk or walking the walk.
The price of the United States dollar was floated on August 15, 1971 during the second presidential administration of Richard Nixon. Basically, the previous decade had seen increasing budget deficits combined with a monetary policy that was supportive of the deficits.
But, the United States was not alone in this. Other nations also engaged in expansionary fiscal and monetary policies. This period of credit inflation put sufficient pressure on the world financial system so that the 1960s saw several examples of currency crises leading up to the August 15 break with the Bretton Woods system, the international financial arrangement that had served the post-World War II reconstruction of the global monetary system.
Thus, floating exchange rates became the foundation for the world trading system in the latter quarter of the twentieth century.
Exchange rates respond to a country's economic policies. Remember, however, that exchange rates depend upon what two countries are doing; exchange rates represent relative actions. In general, if one country is following a more expansive policy of credit inflation than another one can expect the value of the former country in terms of the latter country to decline. That is the currency of the former country will become weaker relative to the currency of the latter country.
So what has happened to the value of the dollar since the dollar was floated in 1971?
Since this is the political season and since the president who is in office at the time determines the economic policies of a country, I have divided the last forty years or so by presidents. But, I have not split the time up by when each president took office, I have separated the periods by when a new president is elected. So, this period is divided by the November the president is elected to the November when the next presidential election takes place.
I have used the data series from the Federal Reserve labeled the Trade Weighted U. S. Dollar Index for Major Currencies. This gives the most comprehensive view of the place of the dollar in the world when compared with its other major trading partners.
I begin with President Jimmy Carter because the index does not begin until 1973. Thus, for example, in November of 1976 when Jimmy Carter was elected President, the value of the U. S. Dollar Index for Major Currencies (see St. Louis Fed) averaged about 107. The index was at 96 at the time of the November election in 1980. Thus, the dollar index declined by about 10 percent. This is how the following figures were calculated.
- So, in the Carter administration the value of the U. S. dollar calculated this way fell by 10 percent.
- In the first Reagan administration the dollar index rose by almost 39 percent.
- The second Reagan administration the index fell by about 34 percent.
- In the Bush 41 administration the index rose by over 2 percent.
- In Clinton's first administration the value of the U. S. dollar declined by a little over 4 percent.
- Then in Clinton's second administration the index rose by more than 24 percent.
- The Bush 43 first term saw the value of the dollar fall by almost 25 percent.
- In his the second term of Bush 43, the index rose slightly by a little over 2 percent.
- In President Obama's first term, the value of the U. S. dollar declined by 12 percent.
The award for the biggest increase in the value of the dollar for one term goes to Ronald Reagan during his first term in the White House. Second place goes to the Bill Clinton in his second term.
The award for the biggest decreases in the value of the dollar for one term goes to…Ronald Reagan during his second term. Second place goes to George Bush 43 in his first term.
Let's now look at the performance of the presidents that served two consecutive terms in the White House.
Bill Clinton is the overall winner here. The value of the dollar against major currencies rose by almost 19 percent during his two terms in office.
The Republican president's come out the loser on this…or should we say that the U. S. dollar came out to be the loser when Republican presidents served two terms.
The value of the dollar using this measure declined by over 8 percent during the two terms Ronald Reagan was the president. In the Bush 43 years, the value of the dollar declined by more than 22 percent!
To me, however, the most important fact in this whole exercise is that over the past thirty-six years the value of the dollar fell by almost 32 percent, during Republican and Democratic administrations.
And, if you add the years going back to 1960, we see that the United States engaged in sufficient credit inflation to help sink the post-World War exchange rate system and then achieve a 32 percent decline in the value of the dollar.
If we use this standard as the value to judge presidents over this time period then I would have to argue that, with the exceptions of Bill Clinton and George Bush 41, most presidents would not receive a passing grade!
My problem in the current environment is that I don't see any convincing evidence that the strength of the United States dollar is high on the priority list of any candidate. To me, the basic policy thrust is still to engage in further credit inflation…both on the Republican side and the Democratic side.
Hence, I will continue to stay with my long-term forecast for the value of the dollar. I believe that the secular trend of the dollar will continue to be downward as it has been over the past forty years.
There will continue to be periods of time when the value of the dollar will strengthen against the major currencies, as we have seen. And, the dollar will perform better against specific individual currencies as the economic policies of these countries promote more credit inflation than does the United States. But, overall, I believe that over time, the value of the United States dollar will be lower than it is today.