Understanding the Dollar Debate 31 comments
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A strong dollar seems patriotic. It is also meaningful to long-term purchasing power. A weaker dollar means a higher cost for foreign products, and that is inflationary for the US consumer.
This natural impulse is at odds with current equity trading. A friend asked why the market had a 200+ rally in the DJIA on Monday. My answer -- dollar weakness-- was counter-intuitive and unsatisfying, but accurate.
Dollar's Drop Helps Dow Hit New 2009 High, explained Briefing.com.
Yesterday the Dow declined 100 points. Why? Many cited dollar strength.
Investors and traders alike need to pay attention to the dollar.
The Prescriptive Viewpoint
Some commentators who choose to advise the government on preferred policy are outspoken on both the need for dollar strength and the policies required. David Merkel calls for the Fed to raise interest rates and the Obama Administration to balance the budget. The prescription embraces a willingness, perhaps even a necessity, for the recession to become much deeper. The resulting unemployment and business failures are part of a needed cleansing process that will avert an inevitable deeper economic decline. This viewpoint is based upon economic theory, not a political viewpoint.
Others seem to advocate similar views with politics in mind. You can watch any nightly Kudlow show to get this argument about "king dollar."
A third viewpoint, represented by Bob McTeer, suggests an alternative. McTeer is a free-market Republican, but he has a pragmatic approach. He recognizes the need for dollar strength in the long run, but notes a short-term problem.
So, my conclusion is there is a strong argument to be made for a strong currency. It just doesn’t apply in the midst of a deep recession when the main problem is inadequate aggregate demand. Many people who don’t acknowledge that are, in my opinion, trying to avoid sounding “Keynesian.”
I’ve said this many times before. My position on a strong dollar is similar to St.Augustine’s position on chastity in his famous prayer: “Lord, make me chaste, but not just yet.” My prayer is, “Lord give us a strong dollar, but not just yet.”
His reason? No individual country can control the currency. All act in accord with internal political mandates.
The positive jolt to domestic GDP caused by a depreciating home currency is well known all over the world. That is why during a global slump such as we are in today we have to guard against competitive devaluations where each country tries to boost its economy through depreciation or devaluation which has the opposite effect on its trading partners. The term of art is “beggar thy neighbor” policies, sometimes called “beggar my neighbor” policies.
The Descriptive Perspective
David Merkel and other observers are quite correct in noting the divergence between stated and actual public policy. Investors need to understand this.
There is an inverse relationship between the dollar and equity strength. There are several hypotheses (and little evidence) to explain the daily trading.
Investment Implication
There is more here than I can cover in a single piece, so I will take a deeper look. We need to investigate the dollar carry trade, the alternative causal models in the relationships, and the time frames for the various arguments. There may not be enough data for an objective answer, but I will give it a shot.
Meanwhile, investors should realize that actual policy is aimed at improving economic performance, even if the dollar declines. If you are an investor, put aside your opinion about whether the policy is correct.
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This article has 31 comments:
What dose America have to compete with that?
This is not a debate but an existential struggle between the proponents of a fake currency and real money.
A weak dollar is just a euphemism for a fiat dollar which is a false dollar: it is the biggest lie in the world today; one that hugely benefits a grasping and corrupt elite, as all big lies do.
A strong dollar is a reliable store of value and global medium of exchange. A strong dollar represents economic truth and goodness.
A weak dollar is a quantification of wealth destruction by the US Regime. A strong dollar is tangible evidence of the wealth creating and economic regeneration power of America.
A weak dollar today means that tomorrow the dollar will be the arbitrary scrip of a third world kleptocratic oligarchy reigning over the geography that was once America.
No one works, buys anything, drives a car. Everyone sits with his family and remembers what we have in America and why we can't give up.
General Strike once a month.
Let Big Business and Big Government both understand that they are sitting on a powderkeg.
On Nov 13 06:56 AM User 353732 wrote:
> A weak dollar is a sign of National enervation. A strong dollar is
> a symbol of National vigor.
>
> This is not a debate but an existential struggle between the proponents
> of a fake currency and real money.
>
> A weak dollar is just a euphemism for a fiat dollar which is a false
> dollar: it is the biggest lie in the world today; one that hugely
> benefits a grasping and corrupt elite, as all big lies do.
> A strong dollar is a reliable store of value and global medium of
> exchange. A strong dollar represents economic truth and goodness.
>
>
> A weak dollar is a quantification of wealth destruction by the US
> Regime. A strong dollar is tangible evidence of the wealth creating
> and economic regeneration power of America.
>
> A weak dollar today means that tomorrow the dollar will be the arbitrary
> scrip of a third world kleptocratic oligarchy reigning over the geography
> that was once America.
I think you need to look at the carry trade, etc. too...
The US$ is being manipulated big time. A few weeks ago our good ol' buddy Ben came out (in the evening - before the start of the business day in Asia) and hinted the Fed might boost interest rates since the US$ was sucking fumes. Then, last week it was more of the same and nothing changed...
I think the US has been openly warned (threatened) on allowing the US$ to fall too much by those who would be left holding the bag.
That's my take on things right now, a lot of manipulations be central banks...
I guess it's been working for Disney...
On Nov 13 04:17 AM Maxe Paul wrote:
> In a country such as mine, Australia, we have hard assets in the
> form of commodities, and a strong banking system.
>
> What dose America have to compete with that?
The funny thing is that it was the icon of free market capitalism, Milton Friedman, who wrote volumes on the need for monetary stimulus from the government in recessions. Partly because of his wisdom we went 50 years without a big recession that required huge monetary stimulus. Now we do and people don't want to remember or hear his advice.
Aggregate demand matters. You can argue what is the best way to stimulate it (as Keynes and Friedman did) but people here want to deny that its even important. As if demand will just come back magically if you reduce the marginal tax rate, which is already historically low, a few more percentage points lower.
'It will boost our exports and lower the real value of our private debts.'
It will also reduce domestic returns forcing investors to look elsewhere for income and will reduce the value of savings: that great hidden tax; inflation.
The only worldwide solution for currency manipulation is a reference commodity index where currencies are traded against but it wont solve the fundamental demands of producers like China to have a inflation protection and secondary profit through it. They are going to import inflation one way or another.
On Nov 13 04:17 AM Maxe Paul wrote:
> In a country such as mine, Australia, we have hard assets in the
> form of commodities, and a strong banking system.
>
> What dose America have to compete with that?
IMHO our financial sector has taken over far to large a percentage of our economy and our lack of manufacturing and exports is a large reason why our middle class has declined.
If your interest are with wall street your post makes sense, I on the other hand, as with the majority of voters, am not.
On Nov 13 06:56 AM User 353732 wrote:
> A weak dollar is a sign of National enervation. A strong dollar is
> a symbol of National vigor.
>
> This is not a debate but an existential struggle between the proponents
> of a fake currency and real money.
>
> A weak dollar is just a euphemism for a fiat dollar which is a false
> dollar: it is the biggest lie in the world today; one that hugely
> benefits a grasping and corrupt elite, as all big lies do.
> A strong dollar is a reliable store of value and global medium of
> exchange. A strong dollar represents economic truth and goodness.
>
>
> A weak dollar is a quantification of wealth destruction by the US
> Regime. A strong dollar is tangible evidence of the wealth creating
> and economic regeneration power of America.
>
> A weak dollar today means that tomorrow the dollar will be the arbitrary
> scrip of a third world kleptocratic oligarchy reigning over the geography
> that was once America.
On Nov 13 04:17 AM Maxe Paul wrote:
> In a country such as mine, Australia, we have hard assets in the
> form of commodities, and a strong banking system.
>
> What dose America have to compete with that?
On Nov 13 01:12 PM K-Mac wrote:
> iPhones!
>
>> What dose America have to compete with that?
But you're right, as an investor, I do put aside my disdain for irresponsible regulators, while converting the wages I earn here in the USA into non-USA investments and in commodities. I guess that's something like a personal dollar carry trade, but the difference is that the wealth I invest is owned by me and not borrowed. I'm not alone. There are many others in the US who are doing the same and I expect that number to increase exponentially as inflation takes its toll.
Jeff Miller wrote:
> Meanwhile, investors should realize that actual policy is
> aimed at improving economic performance, even if the
> dollar declines. If you are an investor, put aside your opinion
> about whether the policy is correct.
On Nov 13 10:29 AM Machiavelli999 wrote:
> The funny thing is that it was the icon of free market capitalism,
> Milton Friedman, who wrote volumes on the need for monetary
> stimulus from the government in recessions.
And, sure, it makes sense to produce and manufacture more, instead of relying so heavily on a credit based economy. But it's not helpful to pit the interests of Wall Street versus the interests of the middle classes as if a bust for one side means a boom for the other. It won't in this case.
The huge amount of deficit spending that's going on now will necessarily lead to a lower standard of living for the middle class. Inflation may make their home mortgage balances decrease in ounces of gold, but it will also gut their savings. Couple that with the fact that there is always a lag in wages catching up to inflation, therefore during periods of heavy inflation, average working stiffs lose substantial wealth.
Although, I'm positioned for it from an investment standpoint, I dread what's coming because it's going to lead to a great deal of misery for people who have struggled to save, as well as those who are living on tight budgets and fixed incomes. I think the atmosphere in this country is going to be pretty bleak for a few years, and while I can survive it, it won't be very uplifting to experience.
On Nov 13 01:21 PM surfgeezer wrote:
> A weak dollar empowers manufacturing and exporters. There is a reason
> China and Japan are so willing to buy our debt. It allows their goods
> a competitive advantage and strengthens that section of their economy.
> A strong dollar increases the strength of the financial sector.
>
>
> IMHO our financial sector has taken over far to large a percentage
> of our economy and our lack of manufacturing and exports is a large
> reason why our middle class has declined.
>
> If your interest are with wall street your post makes sense, I on
> the other hand, as with the majority of voters, am not.
In 2002 we were at parity with the Euro, today it costs us $1.48. That's 32% slide for the USD versus the Euro. In 2002 an ounce of gold would cost us about $300. Today its $1115. That's a 73% gutting that we've taken versus gold on the dollar just in the past eight years.
At what point do you think we should consider breaking away from the strategy of weakening the dollar for prosperity? We've been cutting it off at the knees for the past decade and it's not exactly increasing our exports or production of material goods. In fact, our trade deficit, debt, and unemployment rate has risen during this dollar weakening decade.
When do you propose we abandon the helicopter drops?
Or will things get better and better as our buying power goes from $.68 on the dollar toward $.10 on the dollar? Will it help the teachers and students more if we take down the value of the dollar to, let's say, $.01? Will it help them even more if we take it down to $.001?
On Nov 13 03:04 PM user396040 wrote:
> A weaker dollar encourages US exports, helps domestic manufacturers
> compete against importers, encourages foreign tourists to come to
> the USA and American tourists to stay here, increases the dollar
> denominated earnings of US companies with foreign operations, and
> generally makes it easier to repay dollar denominated debt...
>
>The dumbest move of all that we could make now would be to
> "balance the budget" and lay off a lot of teachers, stop making student
> loans, cut back on science research, and reduce training for unemployed
> workers. What we should do is to guarantee a college education to
> every qualified student, make educational opportunities available
> to all Americans throughout their life times, make the academic year
> 12 rather than 9 months, and pay teachers 6 figure salaries to attract
> better people to the profession. In the long run, this (not high
> interest rates, the gold standard, or a balanced budget)is what will
> make our currency and our nation strong.
I think that an important thing to remember is the rate of decline is almost as important as the fact of the decline. A currency "crash" is the worst possible outcome.
I'm sure that I'm not alone at getting increasingly annoyed with Geitner, and others within the administration trying to "jawbone" the dollar higher. This is another case of "actions speak louder than words". (Not that this administration has any sort of "lock" on talking a "strong dollar", while acting in a contrary fashion. It seems to be somewhat of a regular occurrence that transcends party lines).
I recently suggested in a short article that the Fed SHOULD have bumped the rate by .25% as a warning that TPTB wouldn't allow the dollar to sink indefinitely, while not slamming a weak economy into "reverse". The inverse correlation between the dollar and equities stems from the thought that shares of stock represent a claim on "real" assets.
US export goods that are fundamentally technological advance and always have a premium to it. People buy the products because of quality so lower price mean lesser revenue as a lot of external country still buy US goods.
So Weak dollars may not really help the economy and as Jeff has say, the world is printing money with their stimulus and so dollars may not get weaker now. What we get is a world wide phenomena call INFLATION.
On Nov 13 10:29 AM Machiavelli999 wrote:
> This might be one of the most sane articles I've read here at SA
> on the dollar. The fact of the matter is that right now we need a
> weaker dollar. It will boost our exports and lower the real value
> of our private debts. Of course, people don't want to hear it here
> because facts and results don't give a sh*t what your political views
> are nor how many times you have read Atlas Shrugged.
>
> The funny thing is that it was the icon of free market capitalism,
> Milton Friedman, who wrote volumes on the need for monetary stimulus
> from the government in recessions. Partly because of his wisdom we
> went 50 years without a big recession that required huge monetary
> stimulus. Now we do and people don't want to remember or hear his
> advice.
>
> Aggregate demand matters. You can argue what is the best way to stimulate
> it (as Keynes and Friedman did) but people here want to deny that
> its even important. As if demand will just come back magically if
> you reduce the marginal tax rate, which is already historically low,
> a few more percentage points lower.
For the majority however, they can't take advantage of the destruction of purchasing power. In fact, the bottom 80% of our country or so will be severely punished by a diminished quality of life as oil, health care, food prices slowly rise. I doubt anyone's getting a big pay raise. Social Security recipients are receiving no COLA this year.
How come after every crisis, the guys who work for Goldman and all the bank CEOs make out like bandits and the national debt (paid by the plebians) just grows and grows?
Rome tried this whole thing out a long time ago. It didn't work then, it won't work now. Why should it? It's the same road to collapse. It'll take a long time of course. They'll drag it out. But the result will be the same. I think people keep expecting gold to spike to 10,000/oz and stocks to collapse but I see just a slow and steady decline. Right now stocks are heading up with the global money printing. It's the ABD trade (anything but dollars). But there will be violent plunges because even AMZN at some price in the 200s is probably riskier than holding a dollar.
It's all been tried before. Politicians work for one class of people. The rich will be fine. Just make sure you're rich. Otherwise this country is not going to be a fun place to live anymore.
"The positive jolt to domestic GDP caused by a depreciating home currency is well known all over the world. "
The problem is that depreciating in the context of the sentence above means much more than the 15-20% (depending on your benchmark) decline that we've seen. The GDP boost through terms of trade that other countries have experienced was caused by a transient tanking that went way beyond what the US dollar is experiencing. At the moment the dollar is half pregnant. To get a trade surplus it is going to have to fall much further.
Can that really happen in the short term? Or more to the point will it be allowed to happen. I doubt it but who knows.
I'd prefer these guys (Fed, government) to accept that they can't drive the dollar low enough to achieve their supposed goals and therefore come up with plan B.
On Nov 13 04:17 AM Maxe Paul wrote:
> In a country such as mine, Australia, we have hard assets in the
> form of commodities, and a strong banking system.
>
> What dose America have to compete with that?
I don't think so. The Yuan is tied to the dollar, so a falling dollar causes it to fall with it. That's why with the USD down about 40% from its year 2000 high the cost of Chinese imported goods remain cheap. If anything there are more signs of deflation in the US economy than inflation.
think about it -
if the prechter crowd is right, and the USD sky-rockets in value, that's basically game-over for the US worker (and taxpayer) and the bankers don't ever get paid back.
who wants to bet the bankers won't get paid back?
On Nov 13 07:03 PM Old Trader wrote:
> Jeff,
>
> I think that an important thing to remember is the rate of decline
> is almost as important as the fact of the decline. A currency "crash"
> is the worst possible outcome.
>
> I'm sure that I'm not alone at getting increasingly annoyed with
> Geitner, and others within the administration trying to "jawbone"
> the dollar higher. This is another case of "actions speak louder
> than words". (Not that this administration has any sort of "lock"
> on talking a "strong dollar", while acting in a contrary fashion.
> It seems to be somewhat of a regular occurrence that transcends party
> lines).
>
> I recently suggested in a short article that the Fed SHOULD have
> bumped the rate by .25% as a warning that TPTB wouldn't allow the
> dollar to sink indefinitely, while not slamming a weak economy into
> "reverse". The inverse correlation between the dollar and equities
> stems from the thought that shares of stock represent a claim on
> "real" assets.
That is possibly the most absurd piece of economic thought I have ever read in my life. If indeed the US let sleeping dogs lie and did absolutely nothing they would now be in the enviable position of complete bankruptcy. 30% unemployment means 30% less tax revenue followed by 30% more unemployment benefits being paid. The banking system would have imploded, causing a total freeze on savings. Any purchase would need to be made through coupons and food stamps, while the possession of gold would be illegal in order to prevent a defacto monetary system from taking over. Civil unrest will then increase as people riot over why the government did nothing to prevent the situation. Meanwhile, due to a lack of raw materials and ensuing inflation of 10,000% the cost of a can of coke on the black market would be around $8000.
I am sick to death of hearing all this rubbish about the US government turning on printing presses to bail out wall street banks or financing Goldman Sachs to manipulate markets with tax payer money. Although it may be fanciful to believe in a populace notion such as this, it simply has not occurred.
Contrary to a common held misconception, the US government has not printed trillions of $1.00 notes and placed them into circulation in an attempt to increase the money supply. What they have done is to sell Treasury bonds to overseas countries such as China with a view to paying back the money once the economy returns to normal. In the meantime these borrowed funds, which by the way do not belong to the tax payer, will be used to ensure that credit is made available to the millions of businesses throughout the US.
The US dollar has lost around 17% of its value since November of last year, around the same time AIG failed. Thanks to 0% lending costs and a boost in their cash reserves', many of these financial institutions are now returning to a position of liquidity. With this, I believe that you will see a strengthening USD sometime over the next 6 months.
Now nobody is implying for one second that everything is back to normal or that things are great, but they sure as hell are better than 8-12 months ago. Sitting back and watching your house burn down in a vein hope that eventually it will start raining, is an easy thing to do. But ask any farmer and they will all tell you that you can wait a bloody long time for those rains to arrive and even then they're not guaranteed.
There seems to be a very strange almost Calvinist "The recession is proof that we did not have enough faith and therefore we must let the failures proceed in order to be cleansed of our sins" streak that permeates Austrian economic doctrine.
> "The prescription embraces a willingness, perhaps even a necessity, for the recession to become much deeper. The resulting unemployment and business failures are part of a needed cleansing process that will avert an inevitable deeper economic decline."
On Nov 13 04:28 PM SnowCrash wrote:
> How much weaker do you want the dollar to get?
>
> In 2002 we were at parity with the Euro, today it costs us $1.48.
> That's 32% slide for the USD versus the Euro. In 2002 an ounce of
> gold would cost us about $300. Today its $1115. That's a 73% gutting
> that we've taken versus gold on the dollar just in the past eight
> years.
>
> At what point do you think we should consider breaking away from
> the strategy of weakening the dollar for prosperity? We've been cutting
> it off at the knees for the past decade and it's not exactly increasing
> our exports or production of material goods. In fact, our trade deficit,
> debt, and unemployment rate has risen during this dollar weakening
> decade.
>
> When do you propose we abandon the helicopter drops?
>
> Or will things get better and better as our buying power goes from
> $.68 on the dollar toward $.10 on the dollar? Will it help the teachers
> and students more if we take down the value of the dollar to, let's
> say, $.01? Will it help them even more if we take it down to $.001?
>
I’m a Canadian and, broadly speaking, what you say about Australia applies to Canada as well. Further, as you probable recall, in the late 1980s and early 1990s both our countries were running large international current account deficits and were experiencing large Federal and State/Provincial Government deficits and accumulated debt. Our domestic private sectors also suffered many structural and productivity problems as well. The upshot was that both countries undertook major initiatives to restructure government programs and services and change commercial and industrial practices to balance government budgets, reduce the deficit and to make the national economy internationally competitive. Both countries therefore came into the current recession in good shape compared to most other countries.
I list the forgoing so that the non Canadian and non Australian readers can see additional reasons, beyond those you specified, why Australia and Canada are both weathering the current recession well. You ask, moreover, “What does America have to compete with that?”. I can suggest one advantage the US has, the size and sophistication of its domestic economy..
The one weakness that Canada and Australia have shown in past recessions since WW II in comparison to the US and other large, mature and broadly based economies is that we (Canada and Australia) are ultimately dependent on a general international recovery before we emerge from recessionary conditions while the US and the other big guys tend to lead the way out because of their large and diverse internal markets. In short, because of our agricultural and commodity focus we may be last into recessions but recessions lag and deepen in our countries while other economies begin to recover earlier. This is particularly so in the case of long and deep global recessions.
Canada and Australia have (as described above) fared particularly well so far in this recession and the fact that increases in international commodity and agricultural markets appear to be leading in the global recovery is a happy indicator that, this time at least, we may not lag in the recovery phase. Time will tell.
On Nov 13 04:17 AM Maxe Paul wrote:
> In a country such as mine, Australia, we have hard assets in the
> form of commodities, and a strong banking system.
>
> What dose America have to compete with that?