Donald Trump Is Talking the Dollar - and the U.S. Economy - Into Decline

Donald Trump Is Talking the Dollar - and the U.S. Economy - Into Decline
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Have you ever noticed that old people tend to shrink during their golden years? It’s not so much that we’re growing in height as old people are losing theirs.

This physical truth is worth keeping in mind for readers interested in understanding movements of the euro in terms of the dollar. With 1 euro presently purchasing 1.13 dollars compared to 1.40 dollars a ways back, some are suggesting the dollar is very “strong.” Some are even saying that the U.S. economy is experiencing “deflation.” This view is particularly popular among supply-side thinkers who generally know better, and who plainly understand the parallel truth that our grandparents’ loss of height is not the same as our gain of it.

Applied to the dollar versus the euro, the dollar isn’t strong of late. It’s actually rather weak. The euro’s decline against the greenback masks this truth. Basically the dollar is less weak of late than the euro is, and because it’s less weak, it’s seen by some to be soaring. Supply siders who once again know better are wringing their hands over deflation. They should relax, and after relaxing, they should consult the price of gold.

Historically they’ve wisely used the price of gold to divine an objective market “opinion” as it were about the direction of the dollar. To paraphrase the classical economic thinkers whom supply siders have historically (and rather wisely) sided with, gold is the commodity least influenced by outside influences. Precisely because there’s so much gold stock versus new discoveries of the yellow metal, its price is impressively stable. It’s no mere coincidence that gold has historically been used to define money. Its stability in terms of value makes it uniquely suited for just that.

To see why gold is so stable, imagine selling a million shares of ExxonMobil. It seems like a lot, but you likely couldn’t move the share price of the global energy giant when it’s remembered that there are over 4 billion outstanding shares of XOM. With gold, big sales of the metal, and big discoveries of it, don’t much move its price when it’s remembered that just about every ounce of gold ever mined is still in existence. When gold moves, the latter is a sign of the value of the dollar moving, or euro, or any other currency one might want to measure in terms of the precious metal. Gold’s constancy is why it’s long been used as money, and also to define it.

Importantly, the price of gold is yet again telling us a different story about the value of the dollar. That gold is rising, which is a sign of the dollar weakening, is evidence of what’s long been true: U.S. presidents generally get the dollar they want.

In President Trump’s case, he complained last week that ECB President Mario Draghi’s announcement of more quantitative easing (QE) “immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA.” Trump added that they “have been getting away with this for years, along with China and others.” In his veiled call for a weaker dollar Trump mis-spoke, and as the dollar’s decline indicates, his error-filled statement could have negative implications for the U.S. economy.

Up front, the sole purpose of money is to facilitate exchange of goods and services (trade), and to facilitate the allocation of goods and services toward future production (investment) with an eye on accessing goods and services in the future. Money is just a measure. It’s not supposed to rise or fall, and it’s not supposed "strengthen" with economic growth. Trump seems to believe the latter as it applies to China. China is growing, hence its currency should be rising in value. No.

In truth, growth is much greater the more stable the currency is. See the U.S. with its stable dollar from the late 18th century right up to 1900. With the dollar a fixed measure as roughly 1/20th of an ounce of gold, it served its essential purpose as a facilitator of trade and investment to the great benefit of the American people. Money is not a barometer, it’s just a measure that enables a great deal more trading and investing necessary for actual progress. Nothing else.

Back to Trump, he mis-spoke with his weird assertion that currency weakness powers growth. That’s an impossibility. The American people are the economy, they earn dollars, so you wouldn’t stimulate growth by eroding the value of their work through the tax that is currency devaluation. As for businesses, they earn dollars too. Plus everything they produce (good or service) is an effect of global cooperation. In that case, a currency devaluation raises the dollar cost of their production, thus depriving them of any competitive gains. What’s true for U.S. companies is true for those in Europe, China and anywhere else.

The truth about the dollar being down versus the euro, yuan, yen, Swiss franc, Canadian dollar, Aussie dollar, and just about every other global currency in the 21st century seems to elude Trump, which means it can’t concern him. In his world, it’s always the “others’ devaluing. That’s not true, nor is it true that devaluation confers a growth advantage on countries.

It doesn’t because investment is the driver of economic growth. Investment is the failure-laden act that enhances our ability to produce more and more with less and less. Precisely because it’s failure-laden, investing is expensive. Devaluation is a huge tax on what’s already expensive when it’s remembered that currency devaluation reduces any returns won by intrepid investors. Devaluation saps growth because it’s a tax on investment. Period.

All of this matters because President Trump’s calls for dollar weakness have picked up in the past week. While a dollar purchased 1/1200th of an ounce of gold when the 45th president entered office, it now purchases 1/1439th. The dollar is weaker, it’s weakening, and by extension the tax on investment without which there is no growth is rising.

Supply siders have long known the above truth. It’s central to the supply side view of the world. Yet much supply-side commentary at the moment is rooted in the falsehood that the dollar is too strong, that the Trump economy is being weakened by “deflation.” It’s quite the opposite. The gold signal long relied on by supply siders is flashing this truth brightly. Unknown is whether an important school of thought will ignore the gold signal to placate President Trump, or if the proponents of progress will alert Trump to the dollar weakness that has felled every presidency that's pursued it since 1971.

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at  

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