Weak Dollar Is the Price to Pay for Economic Growth

The argument about a lower value dollar, or whether there actually is a strong-dollar policy in the U.S. will move on until such time that all and sundry agree on one thing. The political will to address the dollar index weakness is the only question here, and in reality the internal U.S. markets seem oblivious to the ravages of a weaker dollar overseas.

Global central bankers accepted the massive injection of Usd based liquidity that hit the global market after Lehman collapsed, and have to accept the trading arena may not even be here, and if it were, would certainly look different than it does now, without the massive printing of Usd notes.

The cost of that move is now being paid in a lower Usd, and rather than expect the U.S. administration to actually stand behind the Fed, Government, and Treasury calls for a strong-dollar policy, the bankers may have to print their own notes, or to adjust their foreign reserve holdings.

Neither of which will be palatable to most, and both options are what the U.S. has already done. Catch 22; the U.S. phases of sustainable growth have come from periods of weak dollar values, and this may just be the calm before the perfect Usd bullish storm.

It seems that a weak dollar will have to be addressed by overseas holders of Usd notes, and not by those who are actually printing the notes. Go back 35 years and the dollar was revalued with the scrapping of the gold standard, and at that time the global economy accepted U.S. paper debt instead.

It is no different now, the Usd is being revalued, and the rescue of the developed economic markets now has a price to pay; and that is in a weak dollar for a while. However, when that dollar index starts to climb, it may not get back to 75.00 again for a while, and maybe not until the next phase of large economic contraction, which will likely be in 5-7 years if history is anything to go by.

The question of how far the economy can expand in that time may be a moot point, the real qusetion is that when the U.S. shows sustainable growth the strong dollar policy will come to natural fruition.

Disclosure: No Position

Comments

[Moon Kil Woong]

"the real question is that when the U.S. shows sustainable growth the strong dollar policy will come to natural fruition." The whole point of the weak dollar is that the US is using it as a substitution for a distinct lack of sustainable growth. They have been doing it ever since the dot com crash which happened to be when the derivatives boogeyman first appeared.

What is really happening is that the financial system has been layering on the leverage for quite some time. If financial leverage were fat we would be a 500 pound bedridden beast. The nurse calling for more ice cream to keep the economy from starving is only contributing to the process even though they might say, once the US is thin and fit again they can work off the fat. That is a joke. The US can start getting healthy by getting some excercise walking to the toilet and taking a crapper. First to go in the toilet would be the too big to fail financials.

We really can't get better without such disgusting relief and some real economic excercise. And cut out the Federal Reserve and Treasury's fatty food they are feeding us. The sugar and grease is sucking all the nutrients our of our leavfy green dollar bills.

2009 Oct 22 11:04 PM

[Dave Wrixon]

Much depends on what kind of economy you are looking for. China and others have successfully used weak currencies to expand trade. Thatcher, however, took a different approach and when the UK was undergo its Industrial transformation, we had a strong pound for much of the period which seems to have resulted in very significant inward investment.

I personally would conclude that if the US game plan is to get it citizens to work in sweat shops to compete with Far East and elsewhere, then a weak dollar policy is the way to go. If however, they want to continue to compete at the top of the food chain, then they require the capital investment to stay ahead of the game. In such an environment, I feel that a weak dollar and low interest rates will help to starve them of the capital and talent they need. Either way your average American is going to sustain great hardship in the coming years. Few industrialized nations have in the living memory of most seen the kind of deprivation that prevailed in Britain in the 1980s. Even having lived through it, it is difficult to believe that all the suffering was entirely necessary, but what is clear is that restructuring an economy is a difficult and painful process, and there is more than one possible outcome.

2009 Oct 23 03:12 AM

[aussiereader4]

Who will flush the toilet moon kil woong? Hold on for too long and we get a sticky mess.


On Oct 22 11:04 PM Moon Kil Woong wrote:

> "the real question is that when the U.S. shows sustainable growth
> the strong dollar policy will come to natural fruition." The whole
> point of the weak dollar is that the US is using it as a substitution
> for a distinct lack of sustainable growth. They have been doing it
> ever since the dot com crash which happened to be when the derivatives
> boogeyman first appeared.
>
> What is really happening is that the financial system has been layering
> on the leverage for quite some time. If financial leverage were fat
> we would be a 500 pound bedridden beast. The nurse calling for more
> ice cream to keep the economy from starving is only contributing
> to the process even though they might say, once the US is thin and
> fit again they can work off the fat. That is a joke. The US can start
> getting healthy by getting some excercise walking to the toilet and
> taking a crapper. First to go in the toilet would be the too big
> to fail financials.
>
> We really can't get better without such disgusting relief and some
> real economic excercise. And cut out the Federal Reserve and Treasury's
> fatty food they are feeding us. The sugar and grease is sucking all
> the nutrients our of our leavfy green dollar bills.

2009 Oct 23 03:41 AM

[chap08]

Dave, you are mistaken. A weaker dollar would not starve us of investment, just as a weak RMB has not starved China, nor any other mercantilist nation. There is no evidence to support your case. Meanwhile, we have had a decade of large surpluses on the capital account. What has all this excess capital done for us exactly? Answer: it has been malinvested in housing and treasuries because, unlike in China, it makes no sense to invest in productive assets in the US while we are saddled with an uncompetitive exchange rate.

As for working in sweat shops - that misses the whole point. A lower dollar would increase the volume of our exports, reduce imports, and - at the margin - work to make US industry more competitive. No sweat shops involved - but high tech, IT services etc. probably would be involved. Result: you start a positive feed back loop, rather than the negative feed back loop that a stronger dollar would take us back to.


On Oct 23 03:12 AM Dave Wrixon wrote:

> Much depends on what kind of economy you are looking for. China and
> others have successfully used weak currencies to expand trade. Thatcher,
> however, took a different approach and when the UK was undergo its
> Industrial transformation, we had a strong pound for much of the
> period which seems to have resulted in very significant inward investment.
>
>
> I personally would conclude that if the US game plan is to get it
> citizens to work in sweat shops to compete with Far East and elsewhere,
> then a weak dollar policy is the way to go. If however, they want
> to continue to compete at the top of the food chain, then they require
> the capital investment to stay ahead of the game. In such an environment,
> I feel that a weak dollar and low interest rates will help to starve
> them of the capital and talent they need. Either way your average
> American is going to sustain great hardship in the coming years.
> Few industrialized nations have in the living memory of most seen
> the kind of deprivation that prevailed in Britain in the 1980s. Even
> having lived through it, it is difficult to believe that all the
> suffering was entirely necessary, but what is clear is that restructuring
> an economy is a difficult and painful process, and there is more
> than one possible outcome.

2009 Oct 23 06:11 AM

[Glen88]

Dave,

You are also missing the the fact that in increase in the value of the Yuan, which is inevitable, will magnify labour inefficiencies in China.

2009 Oct 23 09:07 AM

[Nom De Plum]

Manufacturing is not coming back to the US no matter where the dollar goes in the next five years. Building a plant and producing goods is a LONG-RUN investment. Managers would have to be convinced that dollar declines are in the cards for a decade or two before seriously committing major sums of capital to US manufacturing. The Chinese manipulated their currency, the US Govt is manipulating its interest rates right now. Government intervention in the private marketplace always has unintended consequences. Unfortunately, even if we elect Ron Paul for President, the US cannot control other sovereign entities like China.

2009 Oct 27 02:39 PM