Matt O’Brien is covering the continuing Scarborough freakout over bearded prophets of non-doom; better him than me. I would say that JoScar is making progress. He seems to have graduated from frantic appeals to imagined authority — nobody else is saying what that guy says! — to efforts to make his case with actual data. Unfortunately, you really need some background knowledge — actually, quite a lot of background knowledge — before you try using economic data to tell stories, a point O’Brien makes abundantly clear.

But this particular episode jogged me into doing something I’ve been meaning to do for a while: talk about the causes of the big decline in the dollar during the Bush years. As O’Brien says, it’s ludicrous to blame this pre-crisis decline on deficits that only ballooned after the crisis struck; it’s also bizarre to think of the dollar’s decline as a tragedy, when it actually took place in the context of mostly low inflation and a growing economy. Still, what was actually going on?

First, we need some perspective. Here’s the 40-year history of the real dollar:

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What you see right away is that the dollar fluctuates a lot, so impressions of big decline depend a lot on your starting point. Think of it this way: maybe the question isn’t why the dollar fell so much during the Bush years, but rather why it was so strong during the late Clinton years. (The tech boom/bubble is an obvious answer).

It’s also interesting to ask who the dollar declined against. And the main answer is Canada and Europe, which together account for more than a third of the overall dollar index. Here’s the exchange rate against the euro and the exchange rate against the loonie; both are nominal, not real rates, but since Canadian and European inflation rates are low and close to ours, that’s not a problem:

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So: the euro was extraordinarily weak in the early 2000s (which I remember from a wonderful bike trip in Burgundy), reflecting teething troubles with the new currency. It recovered, and has stayed strong despite the crisis because of the refusal of the European Central Bank to match the easing of other central banks. Canada, meanwhile, saw its currency rise along with a great commodity boom.

In short, it’s not me, it’s you — the decline in the dollar under Bush probably had more to do with what was going on in our trading partners than with what was going on here. And in any case, again, it was not a problem for America.