Is Obama Weakening the Dollar?

Are Obama's policies hurting the dollar? Daniel Gross of Slate and Newsweek says no but he doesn't tell the whole story.

Gross lets you know where he stands from the beginning.

It's an article of faith among many analysts that the U.S. dollar is in trouble. The response to the financial crisis, they say, has debased the currency. The culprits are the Federal Reserve, which slashed interest rates to zero, printed money, and vastly expanded its balance sheet, and the Obama administration, which has run up huge deficits by embracing Keynesian efforts to stimulate the economy.

The words "article of faith" imply that this is an opinion, possibly based on partisan politics. In fact, this is a core economic belief - that you can't debase your currency without reducing its value. Obama has printed trillions of dollars of new money. A year ago there was a real fear of deflation so applying some inflationary practices could be seen as a good thing but this has to be reigned in or it will have long-term consequences.

Gross ignores these consequences which undermines his column completely. A very real possibility is that the US government will get so deeply in debt that it cannot meet day-to-day costs while meeting payments on the national debt. This has not happened yet but it will unless Obama changes course. China knows this as do most other countries. This is where the long-term threat to the dollar comes from. Gross makes his point by ignoring future trends and only looking at the last decade.

But like so much of what conservatives have been saying recently about the economy and economic policy, this weak-dollar argument ignores current data and recent history.

Gross does some ignoring of his own about recent history. He presents this chart as proof that the dollar has not been hurt by Obama. It shows the dollar gaining value between 1995 and 2002 then entering a steady decline. There is a sudden rise in late 2008 through early 2009 followed by a steep decline.

What Gross is not mentioning is that the Bush administration had a "weak dollar" policy. Bush wanted the dollar to lose value in order to ease the trade deficit. His administration weakened the dollar through low interest rates and high deficit spending. The main change that Obama made to this policy is to speed it up.

If Bush weakened the dollar between 2002 and 2008 through borrowing and spending then how can Gross argue that the same actions under Obama will not do the same thing?

What about that spike in 2008? That happened when banks and financial institutions world-wide seemed on the verge of collapse. Many investors felt that the US was better positioned to survive the fallout of the collapse than other countries. As soon as the crisis was over the dollar resumed its long slide.

An uncomfortable true for both conservatives and progressives is that many of Obama's policies are continuations of Bush's policies. This is an example.