“The people in charge of the dollar at the Treasury and the Federal Reserve are guilty of dollar neglect… The Treasury says a strong dollar is in the nation’s interest? Huh? The Fed says it’s targeting price stability? Huh? … Right now the greenback is in virtual freefall.” – Larry Kudlow, “Resurrect King Dollar”, March 4th, 2008
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With U.S. dollar exchange rates hitting an all-time low last week, and the prospect of stagflation facing the nation, the President is apparently either confused, or is confusing. He doesn’t seem to comprehend the distinction between monetary and fiscal policy. “And thereby hangs a tale,” to quote the Bard.
In an interview with Larry Kudlow last week, the President sought to ease concerns over the plummeting value of the dollar, noting the positives of his administration’s pro-growth policies:
“I think we’ve just come off with a strong period of economic growth, after difficult times. We’d been through a recession, war, terrorist attack, Katrina — and yet, we had 52 consecutive months of uninterrupted job growth, the longest sustained in the country’s history. I’ve cut taxes; Congress needs to make those tax cuts permanent, by the way, in order to send a signal of — that this economy of ours is going to be strong. The deficit as a percent of GDP is below norm. So we’ve had a good record. We’re just in a tough period right now.”
Unfortunately, there’s a disconnect here. The President’s “strong dollar” rhetoric is not being matched by monetary policies which would actually strengthen the dollar. The culprit for the weak dollar is the Federal Reserve’s increase of the money supply over the last decade. It’s the nation’s monetary policy, not fiscal policy which can restore the dollar’s weight. The President is instead focusing on the strength of his fiscal policies which he hopes will add value to our currency:
“[W]e’re for a strong dollar in the U.S. government…I’m confident in the long-term strength of the dollar, because I’m confident in the long-term strength of our economy.”
Let’s cut to the chase: President Bush is either being abstruse or obtuse. He either understands that Fed policies are devaluing the dollar and deepening the crisis, and is not saying anything, or he doesn’t believe it. Despite the disastrous economic situation, the President offered Fed Chairman Ben Bernanke a pat on the back, reminiscent of his praise of FEMA Administrator Michael Brown in the midst of the Hurricane Katrina catastrophe: “Brownie, you’re doing a heck of a job.” Of Bernanke, he says:
“[O]f course we’re watching — in this case, the Fed is watching the relationship between inflation and growth. And I’ve got all the confidence in Ben Bernanke. I think he’s doing a very fine job during difficult times.”
To quote Shakespeare again, “Once more into the breach, dear friends, once more…”
ALG Perspective: In its continuing efforts to thwart recession in the near-term, the Fed’s loose dollar policies – including bailing out investment firms, cutting interest rates, and otherwise increasing liquidity – are set to provoke an inflationary recession in the future. The U.S. should consider taking dollars out of circulation to bolster our currency during this difficult period instead of increasing the money supply. And it should resist the desire on the part of investors to bail out the ailing housing market and instead let that market bottom out naturally. By resisting the cure, the President could be prolonging the disease.
