It's Crucial That Trump Understand the Similarities Between Carter and W.
An enduring myth is that Americans suffered “oil shocks” in the 1970s. Supposedly they were an effect of OPEC exerting its power over the marketplace. If the confused are to be believed, OPEC’s 1973 cessation of sales to the United States caused the price of oil to spike.
Such a view is riddled with holes. For one, the OPEC, or better yet, Arab oil embargo in no way decreased their oil exports to the U.S. Americans still consumed “Arab” oil through the purchase of same from suppliers not embargoed. The embargo was a symbolic gesture of no economic consequence.
Furthermore, the unserious notion that OPEC had market power that it exerted in the 1970s raises an obvious question: why did the Organization exploit such power only in the 1970s? Figure that it formed in the 1960s, but there were no oil spikes then. In the 1980s and 1990s, the price of oil plummeted. Were OPEC nations feeling generous during the final decades of the 20th century, after acting in miserly fashion in the 1970s?
Back to reality, OPEC’s alleged market power has always been rooted in theory, as opposed to reality. The Organization can’t control the oil price. Period. If it could, the price of oil wouldn’t be so volatile. More important, it wouldn’t be so cheap at times.
What happened to crude in the 1970s? The same thing that happened to it in the 2000s. Very little. The real story in each period was the dollar in which oil is priced. It shrank in value. Amid the dollar’s decline in the 70s and 2000s, the prices of commodities most sensitive to the dollar’s direction soared.
All of which brings us to a recent letter-to-the-editor published in the Wall Street Journal, and that was penned by Jimmy Carter’s Treasury secretary, W. Michael Blumenthal. Blumenthal protested a Journal editorial’s suggestion that he talked down the dollar in the 1970s in much the same way that our present Treasury secretary Steven Mnuchin did the week before last. Blumenthal’s letter made plain that “talking down the dollar is wrongheaded,” and added that the Journal’s assertion that he did much the same in the 70s was “a gross mis-characterization of the history of that period and bears correcting.”
About all this, readers should first celebrate. For the longest time another myth has persisted which says the Federal Reserve controls the value of the dollar. Who cares that the dollar’s exchange value is not part of the Fed’s portfolio, not to mention that the Fed’s open-market operations wouldn’t be necessary for maintenance of a dollar price in the first place: to those properly disappointed in the dollar’s modern decline, the culprit has “surely” been the Fed.
Oh well, Mnuchin’s comments were but the latest reminder that the greenback’s direction is an effect of Treasury and/or White House policy. Getting right to the point, if Mnuchin announced tomorrow that the dollar would be measured as 1/1200th of an ounce of gold going forward, or 1 to 1 with the euro, or 1/100 with the yen, markets would comply. Presidents get the dollar they want, and usually communicate it through Treasury.
The Journal’s editorial page criticized Mnuchin’s anti-dollar comments with the above in mind. Blumenthal’s letter merely confirmed what the Journal editorial stressed: Treasury communicates dollar policy as it relates to the latter’s exchange value. Important here is that Blumenthal certainly talked down the dollar despite his protests otherwise. As the late Ronald McKinnon reported alongside Kenichi Ohno in their 1997 book Dollar and Yen, Blumenthal intimated in a June 1977 speech that the dollar was undervalued against the yen.
The above was most certainly a talking down of the greenback simply because as Treasury secretary, Blumenthal could have had any dollar price he wanted. If he’d said the dollar should return to its Bretton-Woods 360/1 relationship with the yen, markets would have complied. If he’d intimated 250/1, markets would have complied. If he’d called for a dollar defined in terms of a gold ounce, markets would have given him just that.
Blumenthal’s very own letter confirms all of the above. He claims to have merely pointed out that “demand and supply in world markets will determine the value of the dollar,” and that he “quickly learned” his lesson once traders took the dollar down. Blumenthal doth protest too much for leaving his out dollar/yen comments that were a call for a weaker greenback, plus by virtue of having “learned my lesson” about the ability of Treasury to move the dollar in markets, he acknowledges how he very much knew early on that the Carter administration could get the dollar it wanted. If it had wanted a stronger dollar, something Blumenthal now claims is wise per his acknowledgement in the letter that “talking down the dollar is wrongheaded,” he could have communicated to the markets a desire for just that. Except that he didn’t.
Worse, he dug himself an even bigger hole. As Blumenthal went on to write in the letter, “It is true that the dollar nevertheless continued to be under pressure and weaken during the period [while he was running Treasury]. But that wasn’t because of a deliberate weak-dollar policy. Quite the contrary. The prime reason for a weakening dollar was a major world energy crisis, with OPEC aggressively raising oil prices.” Blumenthal gets it all backwards.
Evidence supporting the above claim is the early commentary in this piece revealing how toothless is OPEC’s alleged market power. More important, we have stats on oil prices from 1975-79 that reveal how Blumenthal put the cart before the proverbial horse. Indeed, if OPEC had been “aggressively raising oil prices,” then logic dictates oil would have risen the same amount in West Germany and Japan as it did in the U.S. Except that’s not what happened. As Warren Brookes pointed out in his endlessly good 1982 book The Economy In Mind, “While the price of OPEC oil to the United States had risen 43% from 1975 to 1979, the price of OPEC oil to the West Germans had risen only 1%, and to the Japanese only 7%.” Brookes added that “The reason for this huge disparity was that the United States had been systematically devaluing its currency.” Brookes reported in ’82 what McKinnon and Ohno did in 1997.
In Blumenthal’s defense, the dollar’s decline began under President Nixon and Treasury secretary Connally when they delinked the dollar from gold. What’s important is that in the early and late 70s, the oil spikes were an effect of a weak dollar as opposed to a driver of it. Had Blumenthal not mimicked Connally’s dollar errors, there would have been no “oil shocks” in the late ‘70s. Also in fairness to Blumenthal, there would have been no “oil shocks” in the 2000s either.
Moving to the 2000s, oil surely spiked in dollars during the Bush years, but not nearly as much in yen, euros or Swiss francs. This rates mention simply because former Bush administration official Tony Fratto told the New York Times (in response to Mnuchin’s ill-advised statement) the value of the dollar ultimately reflects real economic fundamentals. Except that it doesn’t. And if Fratto thinks otherwise, he’s merely admitting that the economy under his boss (George W. Bush) was disastrous. Fratto has seemingly forgotten that the dollar plummeted against every major foreign currency under Bush, plus gold nearly quadrupled during his presidency.
No doubt all of the above weakened the U.S. economy given the basic truth that economic growth is driven by investment, and investors are buying future dollar income streams when they put money to work. During the Bush years investment was a fool’s errand, which meant that tangibles (wealth that already exists) like land, commodities and oil did very well. They do best when the dollar’s weak. The Bush economy most resembled the Carter and Nixon economies. Hardly a compliment.
Still, the dollar’s decline wasn’t an effect of the weak Bush economy as much as it was a driver of it. It can’t be repeated enough that a weak dollar repels the very investment that drives growth. Rising oil prices reflect the weak dollar. They’re the flashing signal. They’re the sad result of poor dollar policy as opposed to a driver of same.
Blumenthal misunderstood the dollar truth, he still does, plus Bush’s underlings are similarly in denial. The Carter and Bush presidencies weren’t certain failures as much as the dollar policies from both administrations ensured economic malaise. What’s crucial is that all this could have been avoided. Presidents get the dollar they want. Always. Will President Trump realize this before it’s too late?