How Ron Paul as President Would Affect the US Dollar

Ron Paul has over the past few months emerged as the dark horse US Presidential candidate. With a small but growing cadre of devoted supporters, Paul is gaining political traction by campaigning on ideas about financial reform which would dramatically affect the global currency and forex markets.

A staunch supporter of lower taxes, a dramatically smaller government, and long-term conservative monetary policy, a Ron Paul presidency could mean big changes for the US Dollar and its relationship to other currencies. In this article we investigate the specific affects of a Ron Paul presidency on the US Dollar and on the global forex markets.

"The Coming Category 5 Financial Hurricane"

As a part of his belief in decreased government spending and entitlement, Ron Paul has openly criticized knee-jerk expenditures enabled by Congress. In a House floor response to Hurricane Katrina spending, Paul argues that Congress was too quick to throw money at the problem, not considering the affect that this action might have on government spending and thus, the value of the dollar.

Paul criticizes this kind of spending because it causes our budget, economy, and dollar value to suffer. Ron Paul points out that when the government spends money that we don’t have, we are forced to "debase" the dollar. This debasement happens in two ways. First, we have to borrow from foreign lenders, and second because we have to print more money to make up the difference. It’s a risky strategy that causes the dollar’s value to fall and creates an "inflation tax." Paul’s concern is that "there is no guarantee that gracious foreign lenders will step forward, especially without raising interest rates." However, it is worth noting that to-date, this has not proven to be a significant problem.

Dr. Paul proposes that instead of spending to such a degree that we are dependent on foreign backers to lend to the government, we should implement a system that relies on money that we have available. Under Paul’s system, "any new expenditures must have offsets greater in amount than the new programs" and that "the Federal Reserve must stop inflating the currency." Given this platform, it is reasonable to expect that a Ron Paul Presidency would place a much greater emphasis on a balancing the budget, which could potentially stop the dollar’s fall.

War and Foreign Policy

Ron Paul wants to cut down on defense spending. He argues that the war in Iraq has been too costly, both in American lives and "hundreds of billions of dollars." Paul believes that we should exercise caution when we give foreign aid, but at the same time be careful not to isolate ourselves. His foreign policy goal is to "have a strong America, conducting open trade, travel, communication, and diplomacy with other nations."

The implication of this foreign policy can affect the dollar in two ways. First, it would reduce government spending, assuming that the war funds currently being used aren’t just shifted elsewhere. A cut in government military spending of hundreds of billions of dollars would mean a more balanced budget which in turn would mean a more valuable Dollar in the forex markets. Second, a healthier foreign policy could improve economic relations with other countries and perhaps encourage more foreign investment and free trade agreements. These developments would improve the dollar’s value as demand for Dollar denominated goods increased.

Debt and Taxes

Paul, like many politicians running for office, is a fan of lower taxes. His strategy is to let Americans keep more of their money so that they’ll help improve the country’s finances. He believes that lowered taxes will result in positive changes for everyone, "allow[ing] more spending, saving and investing, which helps the economy."

Lowered taxes for Americans affect the currency markets in a variety of ways. With increased money in their pockets, American entrepreneurs are likely to start more new companies and existing companies are more likely to launch bigger projects. This can increase demand for Dollar denominated goods, which puts upward pressure on the Dollar. With respect to forex markets in particular, increased money in the hands of Americans typically means more entrants into financial markets, which means that forex markets, along with other financial markets are likely to continue growing.

Smaller Government

So if Paul lowers taxes, the obvious question is, where are we going to get money for government spending? The answer is, we probably won’t need to scramble for money. It looks like Ron Paul isn’t interested in a high-cost government. He argues that entitlement programs are not where they need to be, pointing out that "if present trends continue, by 2040 the entire federal budget will be consumed by Social Security and Medicare alone."

Paul challenges his colleagues to "rethink the very role of government in our society," essentially implying that the government should stop spending so much money on entitlement programs. It’s likely that he’d cut completely or at a minimum dramatically weaken many government entitlement programs. He plans to cut welfare for illegal aliens, noting that "Americans have welcomed immigrants who seek opportunity, work hard, and play by the rules. But taxpayers should not pay for illegal immigrants who use hospitals, clinics, schools, roads, and social services."

Additionally, he wants to change Medicare, pointing out that the prescription drug plan is just not working. He argues that it’s the "biggest entitlement problem facing our nation," resulting in a plan that "will actually harm many seniors by causing them to lose their private coverage, forcing them into an inferior government-run program." Smaller government achieved by dramatically cutting social welfare programs and lowered defense spending is likely in the short term to increase unemployment and civil unrest. Initially, this might increase volatility in currency markets as investors are made uneasy by the change. In the longer term, however, a federal budget surplus should strengthen confidence in the Dollar..

Paper Money Problems

Ron Paul is highly critical of our current paper money system, arguing that it is "nothing short of counterfeiting" and promotes spending over saving. He supports the idea of a commodity-based money rather than our current fiat system. Paul condemns doing away with the gold standard and proposes that we get back to putting real value behind our dollars.

In a statement on monetary policy and the economy, Paul points out that the dollar’s value has fallen dramatically: "The dollar today is worth only four cents compared to the dollar in 1913, when the Federal Reserve started." He’s concerned that we’re setting ourselves up for trouble because paper money can be rejected and is essentially without value.

Paul is also worried that a currency which is not backed by a commodity stands on very shaky ground, subject to inflation and military involvement. He remarks, "the Federal Reserve, our central bank, fosters runaway debt by increasing the money supply — making each dollar in your pocket worth less."

Paul purports that the real value behind our dollar is "the military might we enjoy," and that creates a world in which other countries "have little choice but to accept the dollars we declare as today’s ‘gold.’" He further argues that this military-money system is the reason why we push regime change in countries like Iraq, Iran and Venezuela: because they have challenged the system. Paul supports "the economic law that honest exchange demands only things of real value as currency," and wants to "return to a money of real value."

The effects of what is perhaps Dr. Paul’s most novel policy on forex markets is complex. Reverting to a commodity-backed currency would, in the short term, require a massive revaluation of the US Dollar as the federal government began to amass enough gold to back the dollar. If this stockpiling was not handled properly it might lead to a run on the dollar which would cause a massive devaluation. Furthermore, the amount of gold necessary to fully back the US Dollar would likely put immense pressure on global gold supplies and thus might limit the ability of the US government to continue to print money at any level which would cause deflation. On the other hand, if an accumulation of gold sufficient to back the Dollar was carefully accomplished, it would over time lead to a far more stable currency as lenders would be assured that they can receive something of real value back for their dollar.

"Free Market Medicine"

Ron Paul, formerly a practicing OB-GYN, wants to dramatically change the US health care system. He supports a health care system without the middle man, free from HMO and government intervention. Paul argues that doctors and patients should have the ultimate authority on care. He aims to improve the care that Americans receive by "rethink[ing] the whole system of HMOs and managed care."

In his essay on "free market medicine," Paul lauds a rural Tennessee doctor who runs a cash practice. Paul points out that by eliminating insurance and bureaucracy, this doctor is able to lower his overhead and charge lower prices. He supports a policy to "unravel the HMO web rooted old laws, and change the tax code to allow individual Americans to fully deduct all health care costs from their taxes." He does not support the "collusion between organized medicine, politicians, and drug companies, in an effort to move America toward ‘free’ universal health care." Rather, he proposes that we move back to a system that we had 40 years ago, when patients paid cash for ordinary services and had inexpensive catastrophic insurance for serious injuries or illnesses."

Dr. Paul wants to lower the government’s role in health care so that medical care can be delivered in a free market and consumers can reap the benefits of the "competition and financial incentives" that keep costs down. The effect of this healthcare reform policy on currency markets is two-fold. One, lowered health care costs will allow consumers to keep more of their money and improve the dollar’s standing by making our economy more robust. Secondly, limited government intervention in health care will decrease the amount of money that the government must spend to support it. This will likely lead to a decrease in the national debt, and thus a rise in confidence in, and strength of, the Dollar.

Conclusion

In conclusion while a number of Ron Paul’s policies will have mixed effects on currency markets, on the whole, a Ron Paul presidency would probably lead to a stronger US Dollar.