By letting the dollar continue to weaken, the Bush administration is making another in its long series of huge, avoidable mistakes.
It is an administration that has had many good intentions and some strong achievements (e.g., tax cuts, post 9/11 homeland protection), but that also has been utterly incompetent, not to mention bullheaded in ignoring important data and empirical evidence, on far too many fronts.
Before discussing the dollar, it might help to understand how the administration's being "slow on the uptake" on this subject fits the longer pattern. It is a pattern of trying to make the facts fit a predetermined policy, rather than letting facts and philosophy mutually inform each other. It is in light of that pattern that a reader might consider that this column isn't merely a false "cry of wolf."
When the administration was confronted with blowback from various agencies suggesting that the weapons-of-mass-murder argument for war in Iraq wasn't quite as solid as all earlier logic had suggested, the administration still focused overwhelmingly on that one argument for overthrowing Saddam Hussein even when the combination of many other good arguments was available. Yes, we were right to go into Iraq. But we were set up for appearing to lose the moral high ground because we never found the weapons.
When John McCain, several generals, and many learned observers, not to mention several millennia of military history, repeatedly suggested that securing the peace in Iraq would require more boots on the ground and less conventional tactics, the administration continued to insist that it had everything under control except for a few "dead enders." It therefore kept trying to cut the number of troops there, prematurely. The result was two years of catastrophic violence before Gen. David Patraeus's surge finally turned the tide back towards ordered liberty.
When conservatives begged and begged and begged again for a stronger stand against wasteful spending (and, concurrently, for a crackdown against ethical lapses in Congress), the president continued to push for expensive programs and refused to veto a single spending bill. Fiscal conservative angst (along with widespread anger about ethics) drastically eroded enthusiasm for GOP candidates in 2006, and that lack of enthusiasm in turn made it harder to find people to make the conservative case to independents. Result: Republicans lost both houses of Congress.
When the entire nation had been bombarded for four days with horrifying scenes of Hurricane Katrina's devastation and of the absolute crisis of humanity in parts of New Orleans, the president still went public with his bizarre assertion that FEMA chief "Brownie" was doing a "heckuva job."
When, more than three months later, New Orleans and Louisiana had shown incredibly weak progress in recovering on their own, and when the absolutely obvious conundrum was how best to promote reinvestment in housing there even as bureaucratic snafus and an overwhelmed insurance industry were creating a plethora of confusion and uncertainty, conservative U.S. Rep. Richard Baker of Baton Rouge came up with an ingenious (and, in the long run, less expensive) plan to create a semi-private Louisiana Recovery Corporation. Congress seemed to be leaning in its favor, but the administration decided to smother the plan. Two full years later, the death of the Baker Plan remains the single biggest mistake in long-range Louisiana recovery efforts.
When the GOP base showed time and again that judicial appointments were a crucial issue, the administration made not one but three big mistakes. First, as recounted by Jan Crawford Greenburg of ABC News (formerly of the Chicago Tribune), Alberto Gonzales deliberately chose not to have the administration weigh in strongly against the filibuster of Miguel Estrada (but instead to leave it up to Senate Republicans to handle). Later, the administration also was strangely mute when Majority Leader Bill Frist proposed the "constitutional option" to outlaw such abuses of the filibuster. Finally, despite many years of development of conservative lists of highly qualified, highly politically salable, potential Supreme Court nominees, the president chucked all those lists and tried to anoint the manifestly unqualified Harrier Miers. In addition to being a political disaster, the nomination was a disservice to the loyal Miers -- a perfectly respectable lawyer who just hadn't had the proper exposure to constitutional law, but who might have made a reasonable appointment to a lower appeals court for some serious seasoning.
Finally, when all evidence -- overwhelming evidence -- was that the administration's preferred approach to immigration would shatter whatever unity remained on the right after the terrible 2006 elections, the administration not only pressed ahead with its plan but insulted conservative opponents and repeatedly misrepresented conservatives' proposals and their motives in so doing.
ALL THIS IS RELEVANT because it shows an administration that, no matter how high its ideals, has been repeatedly asleep at the switch. And so it is again with regard to the free-falling dollar. Other experts (here, here, here, and here, among many others) have explained and will continue to explain the details of what is now a crisis in the dollar's value. Leaving aside the abstruse particulars, the subject actually isn't that difficult to grasp. When the dollar loses value when compared to commodities like gold and oil AND when compared to other currencies, the demand for dollars decreases worldwide in a sort of vicious cycle. When few people want dollars, few people want dollar-denominated assets. The dollar then weakens further. Then, when a misguided Fed eventually reacts by hiking interest rates in response (supposedly to re-strengthen the dollar it just weakened), it merely creates a yo-yo effect that causes uncertainty and instability. Indeed, the Fed might be moved to hike rates so much that a really serious recession ensues -- which in turn weighs further on the dollar's value.
Amazingly, this supposedly conservative president and the supposedly conservative Federal Reserve chairman seem to have bought into the prototypically liberal, Keynesian economics from which a quarter century of Reaganomics should have cured them. Their idea is that economic growth and inflation work in lockstep, specifically that if the economy grows too much, inflation must be right around the corner. Their supposed cure for inflation is less growth, and their cure for too little growth is more inflation. This backs the Bush Administration and its hand-picked Fed chairman into the stance that in order to contain inflation, it must put people out of work.
Despite the truth that real economic growth can occur without bad inflation, the Bernanke Fed keeps trying to raise interest rates to slow inflation by slowing the economy, or vice versa, as the current circumstances seem to dictate. And because Keynesians equate a strong dollar with a strong anti-inflationary bias, they likewise believe that a weak dollar is needed to ward off a recession.
All of which is not just wrongheaded, but completely contradicts all the evidence of two decades of having a very strong dollar at the same time the economy was growing by leaps and bounds without inflation.
Despite all that evidence, the administration has been sending signals from day one that it actually prefers a weaker dollar, beginning when then-Treasury Secretary Paul O'Neill noted that a "strong dollar" meant little in policy terms. O'Neill's successor at Treasury, John Snow, continued with the message by asking at a G-8 meeting in France, "What's wrong with a weak dollar?" Now, though, even French President Nicolas Sarkozy is warning that a weak dollar is a threat to world economic stability -- and even supermodels are sounding the alarm.
Unless the dollar's decline is stopped by strong words and concrete actions, and soon, the American economy is in serious danger of sliding into the sort of stagflation -- stagnation plus inflation -- that rocked the nation throughout most of the 1970s.
Again, to repeat, it is absolutely possible to promote a stronger dollar and to let interest rates fall at almost the exact same time -- if dollar stability, rather than a specific target for inflation through manipulated interest rates, is the goal. Increase the value of the dollar, and investors will come running back to dollar-denominated assets...and interest rates can fall, thus expanding the economy. A strong, stable dollar is consistent with low, not high interest rates.
With obvious evidence at hand that dollar weakness is roiling world markets, the Bush administration and the Federal Reserve still may have time to ward off disaster. But that time is fading fast, and an economic Katrina could await if officials don't come to the dollar's rescue.
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