Dollar on a Roll in Spite of Obama

November 5, 2014

Rounding to the nearest percent, the dollar so far this year has appreciated about 10% against the euro, 9% against the yen, 8% versus the Swiss franc, 7% relative to the Canadian dollar, 6% vis-a-vis the kiwi, 4% against the Aussie dollar and sterling and even 1% versus the Chinese yuan.  Given the widening perceived contrast between the U.S. economic outlook on the one hand and those of the euro area, Japan, and many emerging markets on the other, upward dollar momentum has been building lately, and many analysts are predicting a multiyear uptrend like those in 1980-early 1985 and from 1995 to 1999.

Image is in the eyes of the beholder.  Yesterday’s election was a virtual vote of no confidence in President Obama and the Democratic Party’s priorities and values.  Exit polls indicated that disappointment with the U.S. economy and greater confidence in Republican than Democratic management of the economy factored heavily in voter choices that handing a broader-than-expected victory to the Republicans.  All things considered including the dire circumstances that Obama inherited in January 2009, the U.S. economy’s track record hasn’t been as bad as advertised.  In many respects, the performance ranks well against previous presidential stewardships going back to 1961.  This matter of which presidencies achieved the best economic trends draws considerable consumer interest.  Among the 5,388 articles that I have posted on this blog, the one that by far attracted the most traffic was an empirical study that examined this very question and discovered a consistent pattern of better trends when there was a Democrat in the White House. 

Obama’s presidency is now almost six years long in the tooth, sufficient to being judged against his predecessors despite the horrendous recession early in his presidency.  Using the same criteria upon which other presidencies were judged in the earlier posting, Obama’s economic record can be summed as follows.

  • Real GDP grew 1.8% per year on average but 4.1% annualized over the last reported half year and 2.3% between 3Q13 and 3Q14.
  • Nonfarm payroll employment expanded 0.7% per annum over the whole period, which was weak, but 1.9% over the last year, which slightly exceeds the long-run average pace.
  • The Dow Jones Industrial Average climbed at a torrid 14.5% per year in spite of a huge drop in Obama’s first month and a half.
  • Consumer prices rose 2.1% per annum, and the pace of core CPI was 1.7%.  The overall CPI also rose 1.7% in the past 12 months.
  • The dollar achieved the rare achievement of appreciating on balance against both the euro (0.6% per annum) and the yen (4.2% per year).
  • Washington’s fiscal deficit contracted from 10.1% of GDP at the end of the Bush43 presidency to 2.8% last fiscal year.
  • The U.S. current account deficit has been halved from 5.1% of GDP to 2.3% of GDP, thanks to an impressive resurgence of manufacturing.

During the Obama presidency, a hands-off currency policy toward the dollar has been observed religiously.  The institutional office charged with formulating dollar policy, the Secretary of the Treasury, has hardly ever commented on the dollar’s external value, and neither China or other governments have been labeled currency manipulators.  The dollar’s value is left to the marketplace to decide. 

Obama has worn out his welcome with investors, like voters, so what gives?  Individuals are not attuned to macroeconomic trends.  The more skewed the distribution of GDP, the less correlated becomes the experience of individuals to what’s happening in the U.S. economy as a whole.  Perceptions, moreover, are very impressionable by the media, and rightly or wrongly the president gets the blame of the acclaim for what’s happened.  One’s representatives in Congress have little influence over what Congress as a whole decides, and a single voter gets to decide but a tiny fraction of Congress anyway.  Everybody votes for the president and therefore has a privilege and responsibility to vent their opinion on the job he or she is doing.

Obama makes an easy target to feel disappointment.  He came to office with seemingly insufficient qualifications, catapulting from a initial election to the Illinois senate to White House in the space of four years.  That’s not his fault.  Rather it’s a flaw exposed by vesting candidate selection in state primaries rather than a vetting by the political party leaders.  The specter of too little preparation for the presidency is then compounded by some perceived character flaws.    Some key constituencies that supported Obama are not better off now than six years ago.  There’s also too great a tendency for Obama to make promises he cannot keep.  This deficiency goes to the heart of one’s credibility, and once that’s squandered, it can be difficult to get an intended audience to listen.  His speech patterns are so predictable that after 5-3/4 years one cannot discern the real deal from a satirical caricature. 

Economic trends point to continuing dollar appreciation.  However, when the presidency or Federal Reserve bank are under siege, it’s easy for the dollar to get tripped.  It will be hard, but not unprecedented, for Obama to recapture relevance and a supportive aura in the final two years of his presidency.  The reinvention process begins with choosing new advisors, who can do a better job. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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