There is a brutal way to grade administrations on their economic policies: look at what foreign exchange traders do to the currency of a country. This has been a test of political administrations around the world since the world removed itself from the gold standard in August 1971.
If we use the movement of the value of a country’s currency as a grading mechanism then this is how the Obama administration stacks up since it took office on January 20, 2009. The value of the dollar against the Euro from January 20 through July 31, 2009 has dropped 9.3%. Using early morning figures registered today, the drop has been 10.1%. The value of the dollar against Major Currencies has dropped 9.5%.
These are not very good grades!
What are the underlying factors behind this decline? First, the administration is proposing a huge deficit for this year, $2.0 trillion, a deficit that dwarfs all other deficits in United States history! And, some experts are projecting deficits that will continue to average around $1.0 trillion per year for the next ten years or so. Second, a monetary policy that is keeping short term interest rates extremely low, and it has been stated that these rates will be kept that low until possibly 2011.
The Bush administration saw the value of the dollar peak in March 2002 and then decline about 40% into 2008.
What were the underlying factors behind this decline? First, the administration created huge deficits by historical standards, deficits that continued throughout the entire Bush administration. Second, there was a monetary policy that kept short term interest rates extremely low, and it kept them at an extremely low level for two years or so.
Let me quote Paul Volcker once again. He has written that “a nation’s exchange rate is the single most important price in its economy.” This is from the book “Changing Fortunes: The World’s Money and the Threat to American Leadership,” by Paul Volcker and Toyoo Gyohten (Times Books: New York), page 232.
When are we going to learn?