The Myth of the Strong U.S. Dollar

“It is very important to the United States that we have a strong dollar.”

So said the United States Secretary of the Treasury.

Yes, Paul O’Neill said that.

Oh, yes, John Snow said that.

And Hank Paulson.

Oh, you say, that the quote is attributed to Tim Geithner, who made the statement yesterday at a news conference of Asia-Pacific finance ministers.

As my good friends would say, “you have to walk the walk, not just talk the talk.” Or, in the case of those looking on, “watch the hips, not the lips.”

The only public person alive today that, in my mind, has any credibility on this issue is Paul Volcker. And, it is Paul Volcker that has written, “A nation’s exchange rate is the single most important price in its economy; it will influence the entire range of individual prices, imports and exports, and even the level of economic activity. So it is hard for any government to ignore large swings in its exchange rate…” (This quote is found on page 232 in the book “Changing Fortunes: The World’s Money and the Threat to American Leadership” by Paul Volcker and Toyoo Gyohten, Times Books, 1992.)

The United States government has no credibility left when it comes to the value of the United States dollar.

During the administration of Bush 43, the value of the United States dollar fell by 37% against an index of major currencies from February 2002 to March 2008, while the dollar fell in value by 45% against the Euro from February 2002 to July 2008.

The United States dollar did rebound at the time of the financial crisis: up 19% against the index of major currencies and up 23% against the Euro.

However, since February of this year the United States dollar fell back by about 13% against the index of major currencies and by about 15% against the Euro.

In watching the hips, not the lips, we see for the United States government potential cumulative fiscal deficits of $15 to $20 trillion over the next 10 years. We have a banking system with almost $1.1 trillion in excess reserves during the two week period ending November 4, 2009. We are faced with an unknown “exit strategy” to remove these excess reserves on the part of the Federal Reserve System.

And all this with several other “shocks” on the horizon. Obama “owns” Afghanistan now and it is totally unknown what his “new strategy” for that country will mean in terms of more government spending. Then there is the health care initiative. Obama has said that the program should not add “one dime” to the deficit, yet all indications are that whatever is passed will add to the deficit, although we don’t know what that amount will be. Then there is the climate change bill along with some other proposals that are waiting in the wings.

Oh, yes, people within the administration have suggested that the rest of the TARP money, whatever that amounts to, can be applied to reducing the deficit. Whoopee!

I hear the Obama administration talking the talk. I don’t see them walking the walk.

And what about Bernanke? He is staying particularly silent these days. Oh, yes, we learned from the New York Times earlier this week that he is letting Barney Frank do all his talking for him.

The strong dollar is, at present, a myth.

It will continue to remain weak and its value will continue to trend downward for the foreseeable future.

How far forward am I looking?

I will continue to believe that the dollar will remain weak until someone emerges that has some credibility. Right now, I don’t know where that person is going to come from.

Comments

[Faisal Humayun:]

I would agree with the author on the outlook for the Dollar...Mr. Bernanke had stated it will back in 2002 (in his speech on preventing deflation) that he would run the printing press and have excess Dollar in the system so that the value of each Dollar falls against goods and services and that would bring about inflation...

He is doing just that and I see no signals that would point to him changing his view or current stance...So, in my opinion, when sentiments get very bearish on the Dollar there will be strong counter rallies...But in general Dollar would trend down as per the wish of the policy makers...

Nov 13 10:55 AM

[JJJ:]

Stop copy/pasting the same stuff on every article. It takes away from good comments that people contribute to these articles.


On Nov 13 11:08 AM PARTICULARMEN wrote:

> Warren Buffett: The financial panic is over (Reuters headline)<br/>
>
> Why Warren Buffett pays $34 billion (market cap) for BNI instead
> max. $24 billion when market DJIA was at 6500?
> Why BRK depends on Goldman Sachs bankers?
> Why Buffett is buying stuff at the peak of the market instead of
> waiting to buy cheaper in a very short time ?
> Does he think DJIA at 10000 is "cheap" ?
> Why he wanna split his highly priced BRK.B shares and make it appeal
> to average John Q. Public investor ?
> He buys BNI at the top to calm the matket panic and "make you buy
> too".
> Why BRK is not selling all their stuff, when W. Buffett knows very
> clear that DJIA will be 5000 soon and will bottom only at 2000 that
> will hit him too?
> Find out in WARREN BUFFET? link
> snipr.com/t7w23

Nov 13 11:56 AM

[Bill S. Friend:]

It is the job of the FED and treasury to talk strong dollar despite their actual intentions. They have to monetize the huge wad of debt America has ingested. The value of the dollar has fallen by 97% since nixon took it completely off the gold standard in 1971.
Exports will have to lead us out of this disaster. Inequities in exchange rates make American products more attractive, as the value of the dollar drops. Railroads will skyrocket, and farms will also become increasingly profitable as our food products become sought after by the rest of the world. Buffet is aware of this certainty. This process will take years to work out.

Nov 13 01:42 PM

[Anthony B:]

If we run a trade deficit as we have, shouldn't our dollar decrease. It'll decrease until it reaches a price where trade balance is restored.

Nov 13 03:01 PM

[stillafewleft:]

re: "The only public person alive today that, in my mind, has any credibility on this issue is Paul Volcker. " ... You forget Ron Paul

Hank

Nov 14 01:54 PM

[bobbybutte:]

as a person who is financially independent solely from dividend investing let me comment

as each year goes on the entitlement spending and interest on the national debt have played a huge role in the budget busting

the first 7 years after the bush tax cuts saw federal tax revenues INCREASE every year despite a stock market which stayed literally flat

Of course 140 dollar oil was an enormus tax on the economy in 2008

Nov 14 02:01 PM