Dollar Must Get Weaker Before It Gets Stronger

Even though sales of existing homes rose for the first time in 6 months, today’s reports on house prices and consumer confidence tell us that the US economy is still in trouble. According to S&P CaseShiller, house prices dropped over 10 percent, the largest decline on record. With the values of homes quickly slipping, it is hardly surprising to see consumer confidence drop to a 5 year low.

The weakness of the housing market spells trouble for the US dollar because housing is the backbone of the US the economy. The Federal Reserve will be forced to reconsider their plans to slow monetary easing.

As one of the lowest paid central bank Governors (if not THE lowest paid), Bernanke’s job is at stake. He can be dismissed by the sitting US President for practically any reason. Therefore he will do all that he can to avert a serious recession in the US economy in fear of backlash from US politicians.

If the US housing market weakens at a time when the slide in the dollar begins to moderate, the US economy could find itself in even more trouble. Over the past 6 quarters, exports have on average contributed nearly 1% to annualized economic growth whereas housing has subtracted slightly more than 1% during the same period. Therefore if the housing market continues to deteriorate and the dollar simply stays at current levels, GDP growth could quickly deteriorate.

That is why the path to a stronger dollar must be through a weaker one.

Comments

[Junior:]

"Housing is the backbone of the US economy"? There are many industries that could be considered the "backbone of the US economy". This does not make any sense.

2008 Mar 25 10:58 AM

[mttom:]

as the dollar weakens oil skyrockets and inflation follows, stagflation anyone??

2008 Mar 25 11:14 AM

[Pent up demand:]

Raise your hands: who wants to live in a country where the primary economic activity is building/selling houses to one another. This constitutes a strong economy?

2008 Mar 25 11:49 AM

[User 167849:]

Housing has been a huge reason for the economy, because (at least in the Wash DC area-Im a RE appraiser), the ability to tap $30-50k a year in tax free equity has led many folks to have a 3rd income: so they buy cars, 2nd houses, boats, remodel, etc. They could not have had that before with standard income. Now that "wealth" is gone.

My favorite has been the use of stated incomes by illegal immigrants for mortgage applications with no real verification by the bank. As one gentleman told me...."they can have the house.....Im not even a citizen...its their problem."

2008 Mar 25 12:07 PM

[thel337:]

GDP cannot grow if everything costs more. energy, food and raw materials costs will continue to rise in the face of a weaker dollar so I dont see the logic in this article.

2008 Mar 25 01:06 PM

[Just Say Whoa!:]

If Honduran Cantaloupes don't kill you, they will make you stronger.

Not really.

The reason the Dollar has fallen, is that Bush told Greenspam to crank up the printing presses.

They even stopped publishing M3 to cover up their dasterdly deeds.

Cut the # of dollars being printed, and the dollar will go up.

It's that simple.

2008 Mar 25 01:13 PM

[Robster:]

clutching at straws...or do you know of a co-ordinated intervention by central banks around the globe.

2008 Mar 25 04:43 PM

[Jason Mark:]

Look, printing more money for the sake of printing more money doesn't do anything. It just sits there. If banks aren't willing to lend it out then who cares. Greenspan can't print more money special1person thats the Treasurey's job. The dollar will go up in value when foreign investment starts flowing back in masses to the US. Before this can happen though, Europe has to look too expensive and China slowing down which I believe is about to happen. Then the US will look more appealing which will lead to a stronger dollar. Yes this will take time to unfold. China will continue to be put under pressure to let its currency float and the euro will continue to appreciate to the point where its too expensive to do business there. Only time will tell.

2008 Mar 25 06:36 PM

[Reinko:]

Hello Kathy,

The path to a stronger US$ has to go via weakness.....

I agree with you on that one.

Yet what is weakness? Is it 1.67 on the Euro or 1.76?????

Mighty slamming against that fake currency named the US$ is adviced of course but where is it's end?

2008 Mar 25 08:32 PM