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Politics & The US Dollar at Trader’s Narrative




Politics & The US Dollar


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In today’s highly charged political environment, apparently everything and anything is game for the machinations of partisan political hacks. Even the US dollar has been pulled into this. So much so that it is generally believed and accepted that the US dollar is kaput, done for, worthless. And that the blame resides on the shoulders of Obama and his young administration.

But what if we step back from the raging and weeping talking heads on TV and instead of opinions, we just look at the facts?

Here is a chart of the US dollar for the past quarter century:
US dollar compared to presidencies republican democrat

Reagan’s presidency presided over a boom and bust in the dollar - with the bust being the winning side. Trickle down didn’t really work but the deficit ballooned as tax cuts to the wealthy reduced government revenues. In 1989, the Republicans continued control of the White House with H. W. Bush’s presidency. While his administration managed to avoid a similar feat, the US dollar fell to new lows during the first half of his term.

reaganomics trickle down

The US dollar regained 50% of its value during Clinton’s presidency. You could argue that it was due to the balanced budgets and the elimination of the federal deficit. Or that it was due to the increase in the tax burden on the wealthy. There was even talk of reducing the federal debt. All that ended with the advent of the W. Bush administration.

Budget deficits and the US debt ballooned due to massive spending increases as well as tax cuts for the wealthy. The result was another major decline in the US dollar. Almost at the end of Bush’s second term the US dollar fell to multi-decade lows but recovered slightly as the last days of his administration drew to a close.

And that brings us to the present day with President Obama. He inherited an economy which almost overnight went into free fall. While I don’t agree personally with the measures taken to buttress the US economy, it bears noting that the US dollar is still above its recent W. Bush low. Also, as a contrarian, it is difficult to ignore the incredibly bearish view on the dollar right now.

So talk of a US dollar crash is either prophetic (if it becomes true) or Chicken Little-ish (if it doesn’t). And while 25 years or so is too small to make judgements on which, the Republicans or Democrats, are the better custodians of the US dollar, it is reminiscent of the counter-intuitive result of looking at the returns of the stock market under different political banners.

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8 Responses to “Politics & The US Dollar”  

  1. 1 Investorsconundrum

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    Babak, you’re the best. Thanks for your exceptional posts

  2. 2 MachineGhost

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    A few points need clarifying.

    Tax revenues exploded under Reagan, not “tax cuts to the wealthy reduced government revenues.” The economic recovery from 1982 onwards was a result of the broad-based tax cuts and Fed-provided liquidity to offset the Mexican debt default. Before that point, the Volker-led Fed was not providing enough liquidity (due to the previous disastrous Fed Monetarism experiement that was arrested with double-digit interest rates that then promptly caused deflation) that the economy was demanding. The dollar peaked in 1986 due to the Plaza Accord agreement to devalue the dollar and rumors of bringing back the gold standard, culminating in the October 1987 stock market crash.

    Under Clinton, tax cuts were again responsible for the 1997 economic boom; the 1993 tax increase stagnated the existing moribund economy (thanks to Bush Sr’s previous tax increase, among other things). With pay-as-you-go rules and gridlock, it was relatively easier for Congress to balance the budget although it never was technically; it was only projected by the CBO to be balanced for fiscal year 2000 based on expected revenues before the dot.com bubble implosion ruined the projection.

    Anything that increases liquidity, whether via fiscal policy or via monetary policy will cause asset inflation, i.e. prices to go up wherever the new liquidity is shuttled into. Inflation is a symptom of excess government spending (”excess” meaning above productive capacity); this normally results in a debased currency over time, but a currency is affected by more than just inflation. When the government spends more than it has taken in from tax revenues, it borrows the gaping shortfall into existence via Treasury Department issuance. All the Fed can do nowadays (it had more reserve power pre-1990) is determine what form the new money can take, debt held by the public or anarchronistic currency.

  3. 3 Damien Hoffman

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    I added this to our Best of the Web for tomorrow.

    Did you make that Reaganomics pic??

    Great work, Babak.

  4. 4 Robert

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    There was no surplus

    Factcheck is full of shit.

    Reagan’s deficits were a result of spending, not revenue cuts

    Early in the Reagan presidency revenues really dropped off, just like they have under Obama. But that had to do with a horrible recession, not rates.

  5. 5 MachineGhost

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    I’d be remiss if I didn’t also mention this site: http://usdebtclock.org/
    Look at the very last line and add that to the traditionally quoted metric.

    Also, the word currency is derived from the Latin word currere which means “flow” or “run” or “ongoing”, etc. In other words, a currency has no value whatsoever unless it circulates, which is a much broader concept pertaining to markets than just limited to cash.

  6. 6 slowandsteady

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    my apologies. i wonder if you can provide some advice unrelated to this post. working on the momo algorithm, i ran into problems with the ev calculation.

  7. 7 Babak

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    slow, not sure what you’re referring to here. Perhaps you meant to comment on another post (?)

  8. 8 betsy gleffe

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    It is real tough to tell what side of the political coin you fall on
    Isnt it. Even though I am conservative I see how feudal it is to
    blame one side or the other. So tell me what am I going to gain
    by reading this article other than you have let me know that you
    are liberal and blame it on conservative government. Its obvious
    you are not interested in a solution just blaming it on a conservartive.
    Its not government that ever was the solution to a problem we faced
    in this country and believe me it wont be government that pulls us out.

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