The US policy mix is changing. The
trajectory of fiscal policy is toward more stimulus, while the trajectory of
monetary policy is toward less. That policy mix, expanding fiscal policy
and less accommodative monetary policy is typically associated with an
appreciating currency.
There are two big examples of this.
The first is the Reagan-Volcker policy mix in the early 1980s that helped fuel
the first dollar sustained dollar rally since the end of Bretton Woods.
In September 1987, the major central banks agreed to drive it lower, and they
did.
The other example of this policy mix is when the Berlin Wall fell.
The German government financed the leveraged
buyout of East Germany on favorable terms. The Bundesbank responded with
tighter policy. This policy mixed fueled an overshoot of the German mark,
not just against the dollar, but against the European currencies. This sparked a European currency crisis that
led to the widening of the narrow ERM bands, and ultimately the monetary
union.
(h/t
Seth MacFarlane) shows the annualized growth of federal spending.
It covers the 1982-2013 period.
Contrary to what may be conventional wisdom, fiscal spending in the 2010-2013
period was the weakest. However, what is
not captured is the most recent increase in federal spending. It
rose 1% in 2014 and 3.1% in 2015. This fiscal year, spending is projected
to rise 3.0%.
Even when the chart is updated, federal
spending still rose the less under Obama’s watch than any of the previous four
presidents. Federal spending growth has bottomed,
and that is before the next president takes the helm. As is often the case, a change in the direction of
policy does always align with the start of a new Administration. For
example, the deregulation and increased defense spending that is attributed to Reagan began under Carter, with deregulation of the airlines and the
stepped up defense spending following the Soviet invasion of Afghanistan.
Both main candidates advocated more public
investment. To be sure, an
increase in spending is not the same as increasing the deficit. The US
deficit had fallen from 10.1% of GDP in
2009 to 2.6% in 2015. This year it is expected to be 3.1%.