In my last post, I took a look at where the value of the U. S. dollar might be going. My feeling is that itshe value will be heading lower.
One of the reasons for this belief is the economic policy of the U. S. government and the attitude of the Trump administration that they prefer a weaker dollar.
I talked about the economic policy generally in terms of the impact the policy might have on economic growth and inflation. One area that I did not really touch on was the growth of the federal deficit and the growth of the government’s debt.
Well, Monday the Congressional Budget Office released its new projections about future budget deficits and the impact these deficits will have on the aggregate amount of government debt that is outstanding.
The CBO announced that the federal budget deficit would hit $804 billion this year. The stunning thing is that this estimate is 43 percent larger than the projection that it had put out last summer.
By 2020, the annual deficit will rise about $1 trillion.
Note that the budget debt for the fiscal year ending September 30, 2017 was only $665 billion.
Given the current projections of the CBO, the debt held by the public will rise to $28.7 trillion at the close of fiscal 2028. This total will be over 92 percent of the country’s gross domestic product. In fiscal 2018, the debt is expected to hit 78 percent of GDP.
This is not good for the value of the U. S. dollar.
The reason for this is that more and more U. S. debt is being financed by foreign investors.
A 43 percent increase in the projection for the budget deficit this year represents a major change in what the government must draw from investment sources outside the United States. And, given the other expected increases in future deficits, the amount of debt outstanding explodes.
On top of this, you have the Federal Reserve attempting to reduce the size of its securities portfolio. This, if it continues for long, will provide additional pressure on financial markets.
“Our dependence on foreign investors to fund the massive deficit has always been the Achilles’ heel of the U. S. dollar.” This quote is from Omer Esiner, chief market analysts at Commonwealth Foreign Exchange, and appeared in the Wall Street Journal.
Mr. Esiner continues, “An abandonment of U. S. assets…is a risk for the dollar.”
Trade wars could also exacerbate the risk for the dollar…not necessarily among emerging-market currencies,
However, major impacts could be felt among major market countries.
The change in tone relative to the dollar has changed substantially over the past year. As I reported in my previous article, year-over-year, the Trade Weighted U. S. dollar index against major currencies has fallen by almost 9 percent; the value of the U. S. dollar against the Euro has declined by almost 14 percent; the value of the U. S. dollar against the Japanese yen by almost 6 percent; and the value of the U. S dollar against the British pound by over 11 percent.
And, the leanings of the market seem to be on the downside…and not for a stronger dollar.
According to Chelsey Dulaney in the Wall Street Journal “Investors have already been amassing bets against the dollar over the past year….Hedge-fund and other money managers are now holding around $25 billion in bets against the U. S. dollar….”
The question then arises, what if the added debt load adds to the pressure on interest rates and causes the Federal Reserve to re-assess its plans for reducing the size of its securities portfolio and causes the Fed to re-assess its plans for raising its policy rate of interest.
This possibility has apparently hit the financial markets. Ms. Dulaney writes “On Monday, investors saw a 26 percent change that the Fed would deliver two or more additional rate-increases this year—after the increase in March—down from 33 percent last week, according to CME Group data.”
In February and March, investors seemed to believe that the Fed would actually move its policy rate four times this year. The times have changed.
This might just be a further indication that the leaders of the Federal Reserve are in the process of changing their plans for the future.
And, what happens if the value of the dollar falls another 10 percent or so?
As readers of my posts recognize, I am a proponent of a strong dollar. To me a strong dollar goes along with a very productive society, a society that is fiscally sound.
What I see is the United States becoming debt ridden, with government policies that focus on short-run high…while leaving programs that would build economic strength on the foundation of an accelerating growth of labor productivity…and a very weak dollar.
Right now, I see little or nothing to hinder this picture of the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.