Why Every President Should be Interested in a Strong Dollar

I had a hypothesis that I wanted to check based on data: A President’s approval rating will go up or down depending on the strength of the U.S. dollar. Here are my findings.

First, my assumptions.

The strength of the dollar is gauged by inflation. The common method to measure inflation is to compare the average price of all commodities. This, however, is an unreliable judge of inflation. There are too many natural free market forces that affect the price of things. Think of how expensive flat screen TVs used to be compared to today. The fact that TVs are less expensive is not a result of the currency getting stronger but of production getting better. Or, think of the opposite situation. If supply is diminished for some reason, say rice crops get destroyed, the rise in prices is not “inflation.” It is simple supply and demand. It is not because of a devaluing of the currency that one has to pay more for rice. All other products stay about the same price, only that rice gets more expensive.

The currency can only get devalued if what is used for currency increases in supply. If using silver, the discovery of a silver mine will devalue silver. In the United States, our currency is not backed by a precious metal. Inflation occurs when more money is injected into the economy. The result of this is rising prices—of all commodities—but “rising prices” is not an accurate definition of inflation.

As such, it is best to take the price of one specific commodity as the best gauge of inflation: gold (or any precious metal). The amount of gold in the world stays relatively constant. The demand for it stays about the same. Thus, the only thing that can affect the price of gold is how much money has been artificially created. Here is a chart of the price of gold from 1950 until present:

 

 

If you take the inverse of the price of gold, that is how strong the dollar is.

The only way inflation can occur is if money is artificially created. Besides some people who counterfeit money, the only way to create money out of thin air is when the Federal Reserve injects artificial money into the money supply.  

The Federal Reserve has the de facto ability to create fiat money in the U.S. economy. The U.S. government sells debt to the public, most of which is gobbled up by “primary lenders,” who are currently comprised of 18 “private” banks that are given the privilege of dealing directly with the Federal Reserve. The Federal Reserve “buys” this government debt from the primary lenders at its discretion. But when it buys the debt, it does not give any commodity-based money for it. Instead, it is an “IOU.” This is how fiat money enters our economy.

The Federal Reserve balance sheet thus gives us some indication of how much artificial money has been created. Below is a chart of the Federal Reserve Balance Sheet.

 

 

This next chart shows the Federal Balance Sheet as compared to the price of gold, starting in 2008. Each is a percentage of the highest each ever reached, which for both was April of 2010.

 

The above chart pretty clearly shows that the creation of artificial money is driving up the price of gold.

My hypothesis started by looking at the price of gold chart. Note that there is a violent upswing in the late 1970s when Carter was President and in the 2000s when Bush Jr. was President. Both Presidents were unpopular and specifically their economics were unpopular. My hypothesis was that a weak dollar correlates with an unpopular President.

So I plotted the value of the dollar compared to Presidential approval ratings starting with Nixon. I calculated the value of the dollar by taking the inverse of the price of gold.

Unfortunately, when I first did it, the dollar lost so much value from 1973 until 1980 that the chart looked like a free fall until 1980 and then it just looked like a flat line. Any changes from 1980 on were imperceptible to the human eye.

In order to create a chart that was meaningful, I thus re-adjusted the worth of the dollar back to $1 every time a new President took office. Therefore, for each President the dollar can be considered to be “[Inauguration year] dollars.” So, for instance, under Reagan, the dollar’s worth is “1981 dollars,” as President Reagan was inaugurated in 1981. If the President won 2 terms, I did not re-adjust the dollar again. Both the dollar value and the Presidential approval rating were taken in December of each respective year.

This is the chart. The red line is the dollar’s worth and the blue line is the Presidential approval rating.

 

 

The first thing that jumps out at a person when viewing this chart is that, as the dollar’s worth was in free fall under Nixon, Ford, and Bush Jr., so was their Presidential approval rating. The same is starting to happen under Obama.

Imagine a horizontal line drawn across the 40% approval rating. The only time the Presidential rating fell below this is when the dollar was in total free fall.

Now imagine a horizontal line drawn across the 60% approval rating. Other than when either Bush first took office, the only Presidents to achieve a rating higher than 60% were Reagan and Clinton. Most of these points were when the dollar enjoyed a generous upswing in value.

Resetting the dollar value back to $1 for each President is actually valuable analytically. It is easy to see how each President left the dollar: if it was stronger or weaker than when they took office.

It is almost amusing that the 2 graphs under Ford are perfectly symmetrical check marks. My guess is that is mostly coincidence.

Of course, the value of the dollar is not the only factor determining Presidential approval. The clearest proof of this is that, under Bush Sr., the dollar increased in value but his popularity went down.

We can also see other known political events affecting the President’s popularity. We can see the Iran-Contra affair of 1986 having a negative effect on Reagan’s approval rating. We can also see Bush Jr.’s approval rating skyrocketing in 2001, after 9/11.

I would submit the following is true: When the dollar is weak, the Presidential approval rating is nearly guaranteed to be low. When the dollar is strong, it is possible and even likely that the President will be popular but there is no guarantee. Other factors may contribute to unpopularity. The only possible way to high approval ratings, however, is with a strong dollar.

A strong dollar is both an underpinning and an indicator of a strong economy. It is an underpinning because a strong economy can only come from a strong currency. A strong dollar upholds a robust economy. It is an indicator because it is fairly predictable to see when the economy is strong or not by watching the value of the dollar.

Our current economics teach the opposite. To create a good economy, we are told the dollar must be debased. John Maynard Keynes said that inflation is necessary for job growth.

If this were true, then any person who counterfeited the dollar is a great benefactor to the economy. After all, they will give that dollar to a business, who will in turn employ someone. Voila: full employment! Think this doesn’t make sense? This is what the Federal Reserve does, for the exact same reason, except on a national scale.

Inflation will wreck an economy. Turning the money spigot of the Federal Reserve on only causes more money to compete for a scarce number of resources. It squanders those resources by letting those who aren’t the most capable have access to them. It inflates the dollar for anyone who has actually earned and saved their money. An increase in artificial money and a squandering of supply hardly makes a good economy. It causes an economic slump. See more at my article: On ‘Demand Side’ Economics: Why Spending Cannot Improve the Economy but Freedom Can

This is why every President should be interested in a strong dollar. A President’s constituents might not be calling him on the phone demanding it. In fact, they may seem to be demanding the exact opposite. But in the end the proof is in the pudding: if the economy is bad, Americans will let a President feel their ire.

To get a strong dollar, a President can start by dismantling the Federal Reserve and all central banking. A President can go one stronger with a return to a commodity-backed currency, such as a return to the gold standard.

Let this serve as a memo to all sitting Presidents: Sometimes it is necessary to give people what they need, not what they want.

 

Amber Pawlik

3/12/11


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