Conventional wisdom has it that Barack Obama’s administration is on the economic ropes.
Unemployment is high and might rise more, even though the recession officially ended more than a year ago. The 2009 fiscal stimulus is widely regarded as having been, at best, a bore, so there is no serious political interest in making another such effort. The political right is pounding the fiscal- responsibility drum all the way to the midterm elections.
Three members of Obama’s original economics dream team -- Larry Summers, Peter Orszag and Christina Romer -- have left or will soon leave the government. On top of all this, there is a widespread perception that the administration is anti-business, which discourages hiring and investment.
What this conventional wisdom misses is that we experienced a severe credit crisis of the kind more typically seen in recent decades in middle-income emerging-market countries. The U.S. can recover quickly -- and jobs can come back much faster than expected -- but only if the dollar now depreciates.
Like it or not, significant dollar depreciation is more probable than most now suppose. The depth of the crisis in late 2008 stunned many U.S. observers, but its features were fairly obvious to people who have worked in Russia, Mexico, Argentina, or South Korea. Similarly, the recovery can share some characteristics with what those countries have experienced.
We shouldn’t anticipate any kind of immediate growth miracle in the U.S., but just keep in mind that after its economic collapse in 1997-98, South Korea grew almost 11 percent in 1999, while Russia -- written off in economic terms after its currency, public finances and banking system effectively collapsed in the fall of 1998 -- still managed a 6.4 percent expansion in 1999 and 10 percent in 2000.
The main reason the U.S. isn’t bouncing back so fast is because of exports and the dollar. South Korea, Russia, and other emerging markets that go through severe crises usually undergo a sharp depreciation in the inflation-adjusted value of the currency, making them hypercompetitive, at least for a while. This makes it easier to replace imports with domestic goods and services and much more attractive to export.
In contrast, the global financial crisis actually strengthened the U.S. dollar as it was seen as a haven, although the dollar has fallen somewhat from its recent peak against major trading partners.
It takes time for a big economy like the U.S. to export its way back to growth; exports were only 12 percent and 13 percent of gross domestic product in 2007 and 2008, respectively, while imports were 17 percent and 18 percent of GDP.
Yet the logic of today’s economy is pushing the dollar down and exports up and, in turn, aiding the businesses that compete against imports. There are three forces at work.
First, the coming stand-off between the administration and Congress rightly worries investors. The Republicans have had a weak record on fiscal responsibility over the past 30 years, while the Democrats have failed to explain even to themselves how the fiscal stimulus prevented the biggest financial shock since 1929 from becoming another Great Depression.
We have a serious issue with the budget deficit but no prospect that this will be dealt with in the foreseeable future. American politics are increasingly seen as dysfunctional by international investors.
Second, with unemployment obstinately high and fiscal policy on ice, the Federal Reserve will continue to push down long-term interest rates. Further rounds of quantitative easing will tend to weaken the dollar. This is a much more effective way to move our currency than any foreign-exchange market intervention even though the Fed will tell you that it really doesn’t care about the dollar.
Third, emerging-market economies are already booming again and demanding the kinds of upscale goods and services that the U.S. is capable of exporting. These emerging markets would like to resist currency appreciation; they prefer to keep their current accounts in surplus, following the Chinese model. This may work for a while, but in this case they will accumulate even more foreign-exchange holdings and, given the stance of U.S. policies, these governments will surely diversify more of their reserves out of dollars.
Global savings will increasingly be parked in Europe, so the key issue is European fiscal solvency. There are some potential bumps in that road, notably Ireland. But while Europe may not boom, it probably won’t default on any sovereign debt.
The dollar is, therefore, likely to depreciate against all floating currencies. If this happens, the impact on U.S. interest rates will be minimal because the Fed will continue its easing. Inflation may rise slightly but high unemployment means the impact will be small, perhaps not even to the 2 percent annual rate that modern central banks quietly prefer.
The Obama administration is blamed for high unemployment -- the result of a financial mania that was emerged long before it came to power. It would be a nice irony if, also through no fault of the administration, jobs return faster than expected as we head into the 2012 presidential election.
(Simon Johnson, co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown,” is a professor at MIT’s Sloan School of Management and a Bloomberg News columnist. The opinions expressed are his own.)
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