We are now seeing headlines proclaiming, "The Almighty Dollar Is Back." When it comes to the value of a currency, we know that everything is relative. And, this Wall Street Journal article tells us that right up front.
"After months of decline, the U. S. dollar is powering higher against the world's major currencies, a reversal driven by the relative health of the U. S. economy that has strengthened the greenback's role at the center of the global financial system."
The relative strength of the United States economy is reflected in the growth rates the International Monetary Fund is forecasting for major areas of the world. For example, the IMF predicts that the U. S. economy will expand by 2 percent while Japan is expected to grow by only 1.2 percent and the United Kingdom by one percent. The eurozone is expected to contract by 0.2 percent.
The message from the financial markets seems to be that the stronger the economy, the less need for continued monetary stimulus. As the United States continues to grow at a faster rate than these other areas, the less need for the central bank to pump money into the economy.
The prime example of this right now is Japan. A lot of the future of the Japanese economy seems to depend up the Japanese central bank easing up it monetary policy. The Wall Street Journal states that "the dollar is up more than 20 percent against the yen since September, as the Bank of Japan has moved toward more aggressive stimulus."
Obviously, the greater weakness in the economies in the U. K. and the eurozone, the greater the need for expansive monetary policy ... at least in the eyes of the international investment community. This may be the picture for he next year or so, but is this the scenario for the longer run?
My forecasts for the value of the United States dollar over the past several years has been based on my expectation that the economic policy of the United States government is one of substantial credit inflation … a credit inflation that would outstrip the credit inflation of most other areas of the world.
This policy of sustained credit inflation was begun in the early 1960s and was continued up into the Great Recession and beyond. This policy of sustained credit inflation resulted in the United States floating the dollar in 1971 and then resulted in the continued decline in the value of the dollar, with two exceptions, until late 2007. The two exceptions are the period of the Volcker credit squeeze in the 1979-1985 period, and the Rubin budget surplus in the late 1990s.
Nothing I have seen so far in Washington, D. C., has caused me to change my mind in terms of the effort of the United States government to continue its policies of credit inflation out into the future. But, as I said earlier, when it comes to the value of a currency in terms of other currencies, everything is relative.
And, the markets seem to be currently saying that investors believe that over the next year or so they expect the governments of Japan, the United Kingdom, and the eurozone to expand credit at a pace that exceeds that of the United States. Will this be the case for the longer run?
In recent years I would have said that the United States would probably take back its leadership in credit inflation. Because of this I continued to predict further decline in the value of the U. S. dollar.
An interesting thing is happening, however. A structural change is taking place in the world. And, this structural change is taking the form of a revolution in energy production. Here I am talking about the increase in the production of natural gas, the shale boom!
"The Department of Energy expects net oil imports to account for just 32 percent of consumption next year, down from a peak of 60 percent-of a larger amount-in 2005. And whereas a decade ago, companies poured money into natural gas import terminals, there is now a hot debate on exports-regarding merits, not feasibility." This from Liam Denning at the Wall Street Journal.
"Cheaper energy does Mr. Bernanke a favor by helping to keep a lid on inflation…and the extra money in consumers' pocket, both from fuel savings and the new jobs associated with rising domestic energy production, aids in the economic healing process from the last recession."
All I can add to this is that I have spent a fair amount of time in the Marcellus Shale area in Pennsylvania and begun to study what is going on there and I can attest to the remarkable changes that are taking place in the economies and cultures of the areas impacted by this play.
The American energy picture is changing. Daniel Yergin is projecting U. S. energy independence in a several years. The subtitle in his latest book, "The Quest" tells it all: "Energy, Security, and the Remaking of the Modern World."
This is a structural change that is going to change our thinking about the makeup of U. S. manufacturing and economic growth. Not only will this impact the energy output of the country, it will also result in a major change in the infrastructure of the country. The cumulative effect can be massive.
And, we thought that the re-structuring of the modern world was coming from changes in information technology. Well, information technology will help to re-shape the modern world. But, the shift in energy production and use is also going to have a major impact on this future. And, it will impact the relative financial picture for the world. Mr. Denning concludes that one upshot of this cheaper energy -- a relatively stronger dollar.
We are not into this future, yet, but the possibilities are encouraging. In the short run, the value of the U. S. dollar may increase as Japan, the U. K., and the eurozone struggle with economic recovery. In the longer run, as I wrote earlier, I still see a future of substantial credit inflation for the United States. But, if the energy revolution in the United States evolves, as some have projected, spurring on economic growth and a spread of economic wealth to more and more people, maybe the politicians will not be as pressed to inflate credit as much in the future as they have done over the previous fifty years.
This would be a nice change but I am from Missouri…show me!