(Photo by Chung Sung-Jun/Getty Images)
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President Trump said yesterday that a declining dollar is great. No, it isn’t. It means trouble ahead.
You’d never know it from the declining value of the dollar, but the U.S. economy is in pretty good shape, especially when you look at the rest of the world. But this increasingly beautiful economic picture will be fatally damaged if we don’t shore up the sinking dollar. A wobbling greenback means future monetary inflation. And that means political disaster for President Trump and the Republican Party. The very definition of inflation is a decline in the value of a currency.
Devaluing the dollar destroyed the presidencies of Richard Nixon, Jimmy Carter and George W. Bush. Rising prices undermined the Biden presidency.
So why is President Trump cheering on the greenback’s slide? Because of the false but persistent and powerfully seductive nostrum that reducing the value of a country’s currency will stimulate its economy by making its exports cheaper and its imports more expensive. After all, the thinking goes, more exports mean more sales for domestic exporters. More expensive imports mean domestic buyers will instead purchase more domestically made products. Voilà, more prosperity!
In the real world, any such advantage—if it should happen—quickly dissipates. At best, it’s an all-too-brief equivalent of a sugar high. Prices—and buying patterns—readjust. So do costs. Devaluation turns out to be a hidden tax. Economies suffer. Making money less valuable means less trust in the future and less growth. Dollar devaluations led to the horrific inflation of the 1970s. The same thing happened in the early 2000s, culminating in the crisis of 2007–09.
Does President Trump want to limp out of the Oval office in 2029 the way George W. Bush did in 2009?
Don’t be seduced by the buoyant stock market. Stocks boomed initially after President Richard Nixon took the dollar off the gold standard. The economy expanded. Then it all fell apart, leading to an ugly bear market and the worst contraction in decades. The same pattern essentially repeated itself in the first decade of the 21st century. President Trump knows what kind of economy he inherited from Joe Biden, thanks in no small part to a less-than-trustworthy dollar.
What most political leaders, military strategists and economists fail to grasp is that a stable, trustworthy currency is a source of national strength. Strong, reliable currencies were critical in enabling the small countries of Holland and Britain to become global powerhouses. The same thing happened to a once-weak U.S. after we gained our independence and the dollar was made as good as gold.
Instead of plumping for a weak dollar, President Trump could realize his desire for a powerful U.S., both short-term and long, by making the greenback the undisputed king of currencies. It would burst the BRIC countries’ pretensions, especially China’s and Russia’s, of replacing the dollar in international commerce.
How? Overturn the disastrous way in which the Federal Reserve operates. It believes prosperity causes inflation, thus setting its policies with an anti-growth bias. This is destructive and absurd.
Incredibly, when setting monetary policy, the Fed ignores the value of the dollar and the impact taxes and regulations have on economic activity. This is like ignoring weather conditions when flying an airplane. A stable dollar—not trying to manipulate the economy through setting interest rates—should be the Fed’s goal. We already have a dicey global situation, with huge debts, too little growth and weak currencies everywhere, as evidenced by the price of gold.
The person President Trump chooses to head the Fed must grasp the need for a reliable dollar and how to achieve it.