The Dollar, the Yuan, the President, and the Price of Oil… a Rant, I suppose

I am not an economist. I heard some sound bites recently from the chairman of the Federal Reserve, Ben Bernanke, that make it sound like being an economist is not that big a deal anyway. So maybe I'm okay. But I am not an economist.

I should begin with a second piece of self-disclosure: I am a macro-perspectivist. My wife (whom I love dearly) once chastised me by saying that when people ask me for a recipe I often start with a discussion of thermodynamics and an explanation of how our stove works. With that in mind, this rant will paint in broad strokes some of the often missed background to the current economic situation between America and China…

Bear with me for a moment and imagine that I am an Arab businessman. I have some oil I want to sell. And because my country is a member of OPEC (the Organization of the Petroleum Exporting Countries), the price I get for my oil is denominated in U.S. dollars.

My problem now is simple. I own a condo in Corsica and pay the mortgage on it in euros. One of my sons in attending Oxford and his living expenses and tuition are due in British pounds. And my oldest daughter has elected (and been allowed) to reside in Canada, where women experience greater freedom than in our home country. I support her with a stipend that I pay out in Canadian dollars. In order to keep my income stable (a measured in any of these currencies), I have been forced over the last few years to continuously raise the U.S. dollar price of my oil. After all, when I bought my Corsican condo in 2000 I could get a euro for 82 U.S. cents and today I must pay almost U.S. $1.50 for that same euro.

What that means is simple. In order for me to get the euros I need out of a barrel of my oil today, I must charge almost twice as many dollars for it. And the situation is similar for pounds and Canadian dollars. The U.S. dollars I get for my oil these days simple don't go as far as they used to in other countries.

Whose fault is that?

As an Arab businessman, I don't think it's mine. But let's go back to pretending I'm actually me (an over-educated Appalachian hillbilly who's had the good fortune to live in 14 time zones on four continents and likes to blog in his spare time…)

I'm not a particularly unbiased source. I've made my affiliation with the Democratic Party public in other forums. But I blame President Bush for the shape of the U.S dollar. And it follows that if I blame him for the shape of the dollar, I blame him for the price of oil.

I am not alone in blaming the President. Dan Froomkin of the Washington Post did the same just today. His logic is simple. The exchange rate is based in large part on the strength of the economy, the supply of dollars (measured in dollar denominated financial instruments like Treasury bonds), and interest rates (which help determine the return on investment people get when they by Treasury bonds). After seven years of President Bush, our economy is weakening, our interest rates are low (to prop it up), and there are lots and lots of Treasury bonds out there – sold to finance the war in Iraq.

When they go to war, most governments try to be fiscally conservative. They institute austerity programs that require less spending at home and they raise taxes. President Bush spent more at home (following the Reagan economic model) and cut taxes. Then he borrowed money to fight the Iraq war – borrowed it by selling Treasury bills to other countries.

In the last few years I've heard people say that, well, you can't really blame the President for the price of gasoline. After all, it's those nasty Arabs that are raising the price. Recently I've clarified the issue for myself: you really can blame the president for the price of gasoline. His policies and actions have lead to the decline of the dollar. And the decline of the dollar is why gasoline at the pump costs what it does.

What does any of this have to do with China? With venture capitalism or private equity in the Far East? For decades now the Chinese currency, the yuan renminbi, has been tied to the U.S dollar.

America is a great place. If we were all New Zealanders, or residents perhaps of some small European country like Denmark or Portugal, we might give more thought to our relationship with the rest of the world. But we're Americans; we think the rest of the world relates to us (not vice versa). We think the dollar is just there, some kind of absolute. The Chinese currency exists primarily in relation to the dollar (which makes sense to us). And we think the Chinese currency is worth too much. If it was worth less (compared to the dollar), our lives would be easier.

What we fail to understand is that every time our dollar becomes less valuable, the Chinese currency becomes less valuable because it is tied to our dollar.

The U.S. dollar has taken a bath on the price of oil and on world financial markets because of President Bush's policies. We need to understand that the Chinese yuan has taken that bath with us. And if we want a stronger dollar against the yuan, it would be easier to argue in favor of that if we had a stronger dollar period.

And that's the fault of President Bush, not the Chinese…

See article.