The late Hall of Fame football coach Bill Walsh used to say that the quarterback’s footwork often told the tale of the games. If Walsh lacked access to the scoreboard, highlights, and game statistics, he could tell which team did well by watching the quarterback’s footwork to the exclusion of everything else.
When we look at U.S. presidencies, a similar pattern emerges. Since 1961, even if you had no access to newspapers, polls, unemployment numbers, and stock-market indices, you could have made some prescient predictions about presidential fortunes simply by watching the value of the dollar. Indeed, with the unique exception of George H. W. Bush, the performance of the dollar has predicted presidential outcomes very well.
Kennedy-Johnson. By 1960, there was a growing consensus in certain economic quarters that the U.S. should leave the Bretton Woods gold-exchange standard. Happily, John F. Kennedy didn’t heed those words, having had the importance of a gold-defined dollar explained to him by his father. As Kennedy said, “This nation will maintain the dollar as good as gold at $35 an ounce, the foundation stone of the free world’s trade and payments system.”
The economy performed well while JFK was alive, and boomed even more once Lyndon Johnson passed Kennedy’s tax cuts posthumously. But as the 1960s wore on, investors increasingly questioned America’s commitment to maintaining the dollar’s relationship with gold. This first showed up in private markets where gold traded far above the Bretton Woods $35-an-ounce fix, and later in government measures of inflation. By the end of 1968, gold was up 19 percent and consumer price inflation had risen to 4.7 percent. And while LBJ’s presidency imploded for many reasons, one largely unsung factor was that Americans had begun to experience the cruel economic retardant that is inflation.
Nixon-Ford. In the first quarter of 1973, real GNP growth under President Richard Nixon was 8.8 percent; by October of that same year, the level of unemployment had declined to 4.6 percent. Despite these seemingly impressive indicators of economic growth, the electorate was unhappy. As is well known today, Nixon severed the dollar’s link to gold in 1971, and over the time in question, a major inflationary period began.
With the dollar lacking the credibility provided by its former gold definition, commodities including gold boomed. From 1972 to 1973 oil prices rose 300 percent, meat prices climbed at a 75-percent annual rate, and the price of a bushel of wheat rose 240 percent. But Washington was unaware of the dollar connection. After a second dollar devaluation in February 1973, Treasury secretary George Shultz said, “there is no doubt that we have achieved a major improvement in the competitive position of American workers and American business.” Arthur Burns assured the FOMC that the inflationary impact of the dollar’s devaluation “would be quite small.” (Shades of Paulson and Bernanke?)
Despite assurances from the monetary authorities, the electorate was not fooled by this hidden tax increase that wiped out earnings. As the real economy weakened, partly in response to rising inflation, the minor break-in that was Watergate delivered the coup de grace to the Nixon administration.
Though the dollar price of gold actually fell a little under President Ford, the slightly enhanced greenback could not make up for the massive inflation inherited from Nixon. His “Whip Inflation Now” campaign, whereby he urged Americans to spend less, quickly became a joke. The inflationary economic baggage of the Johnson and Nixon administrations, combined with an electorate eager for change, ushered in Jimmy Carter’s presidency.
Carter. Contrary to modern assumptions, Jimmy Carter presided over one of the longest periods of economic growth in postwar history. Percentage job growth on his watch was higher than any presidency since.
Numbers, however, can be deceiving. In June 1977, Carter’s Treasury secretary Michael Blumenthal and Federal Reserve chairman G. William Miller communicated to the markets a desire to see the dollar weaker relative to the Japanese yen. Treasury Department efforts to talk down the dollar, combined with a mistaken flirtation with monetarism by Fed chairman Paul Volcker beginning in 1979, led to a 270-percent increase in the dollar price of gold during Carter’s presidency.
Though his feckless approach to foreign policy amidst the Cold War undoubtedly hurt his standing with the electorate, pocketbook issues frequently trump foreign affairs. And with the dollar in freefall, the electorate voted down the stagflationary malaise of the Carter years in favor of Ronald Reagan’s sunny optimism.
Reagan. Indeed, as the probability of a Reagan win in 1980 became more apparent to the markets, the dollar’s collapse was arrested. The price of gold spiked above $800 an ounce early in the election campaign, and then dropped rapidly. As president, Reagan introduced marginal tax cuts, further deregulation of industry, and a stated policy of maintaining a stronger dollar. Though he never achieved his greater desire of returning the U.S. to the gold standard, the growth wrought by tax cuts was a dollar positive and the economy soared.
While this subject is debated to this day, some felt the dollar had become too strong midway through Reagan’s presidency. The result was the 1985 Plaza Accord, meant to slow the dollar’s rise, and the ill-fated Louvre Accord in 1987, meant to stabilize major exchange rates altogether. Still, with the dollar and the economy in good shape overall, Reagan was able to weather the Iran-Contra scandal and ended his two-term presidency with very high approval ratings.
Bush 41. George H. W. Bush is the outlier when it comes to inflation, in that the dollar’s value versus gold actually rose during his term of office. Still, he inherited a 33-percent gold-price increase as a result of the Plaza and Louvre accords. And his presidency was arguably harmed by three unique circumstances that affect the economy in an inflationary manner: Just as inflation is a tax on income, Bush raised the top income-tax rate (breaking a public pledge of “no new taxes”). And despite the strong relationship between oil prices and the dollar, oil actually rose to $40 a barrel in 1991, perhaps due to fears that the war to liberate Kuwait would compromise the world’s oil supply in the near-term.
Finally, much as inflation reorients investment away from the wage economy, the U.S. experienced a significant credit crunch between 1990 and 1992 — not so much due to the S&L debacle, but thanks to Germany becoming a net borrower of capital to finance its reunification. At the same time, a deflationary downturn in Japan similarly led to a reduced supply of capital to the world. The collapse of foreign investment stateside led to a trade surplus in the U.S., and a capital-deficient recession that spoiled Bush’s electoral chances.
Clinton. Upon his arrival at the White House, Bill Clinton stumbled into tax increases and protectionist positions against Japan that initially weakened the dollar. But perhaps chastened by the 1994 midterm elections, he replaced Lloyd Bentsen at the Treasury with strong-dollar advocate Robert Rubin.
Rubin’s dollar stance was a transparent factor in the greenback’s rise, while on his watch Treasury officials ceased their frequent jawboning of the Japanese about the value of the yen. The latter was, in and of itself, a dollar-positive, and it was followed by Clinton’s slashing of the capital-gains rate in 1997. The administration’s strong-dollar policies combined with reduced penalties on investment were a boon to the economy. Clinton survived the Monica Lewinsky scandal and left office with a 60-percent approval rating.
Bush 43. President George W. Bush got taxes right in 2003. But where the dollar is concerned, the second Bush administration has spoken with forked tongue. Though his monetary appointees have paid lip service to the notion that a strong greenback is in our interest, tariffs on steel, shrimp, and lumber, along with a mercantilist stance against China and its yuan-dollar peg, delivered strong signals to the markets that the administration would prefer a weaker dollar.
Markets have complied, taking the dollar down 40 percent versus major currencies alongside a 240 percent rise in the price of gold since 2001. Bush’s fair imitation of Jimmy Carter when it comes to dollar policy has not only blunted the effects of his tax cuts, it has nullified the impressive growth of GDP and jobs that has occurred on his watch. Bush’s approval ratings resemble those of Jimmy Carter.
Interpretation. All this raises the question of why there exists a high correlation between a weak dollar and the fates of presidencies. Much as tax increases reduce take-home pay, inflation erodes the earnings of the electorate. Inflation not only serves as a tax with one hand, it also works against wages with the other through reduced investment.
As the late Robert Bartley wrote in The Seven Fat Years, “inflation always creates winners and losers, redistributing wealth.” Unfortunately for wage earners, when currencies collapse, capital more readily flows into commodities, collectibles, and property, such that entrepreneurs and businesses go wanting for capital. Simply put, workers are bitten twice by inflation — first through the reduced value of their earnings and second through investment slowdowns that make it impossible for employers to increase wages commensurate with rising prices.
Looked at from the perspective of today’s roiling markets, the “money illusion” created by the weak dollar drove a great deal of capital into housing, all to the detriment of the metaphysical economy, or what the late Warren Brookes termed the “economy of the mind.” And with wages eviscerated by inflation, it was inevitable that some Americans would eventually struggle with mortgage payments.
And now, with the dollar at historical lows, it’s often remarked that fixing our inflation problem will be painful. This couldn’t be further from the truth. A stronger dollar would bring unmitigated good, increasing the value and amount of wages thanks to increased investment. Of course, a stronger dollar also could have saved the Bush administration from an inflationary economic legacy that gets worse by the day, and which continues to anger the electorate like no other policy.
– John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading.