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King Dollar Naysayer Nonsense
Despite the conventional criticisms of the financial commentariat, both theory and evidence argue for a strong, stable, and reliable currency as a crucial channel to prosperity. Just think of the reverse: If you could devalue your way into prosperity, Argentina would be the center of the world economy.
But lately, a loud and growing chorus is blaming the rising U.S. greenback for just about everything. “Multinational profits will suffer.” “Imports and trade deficits will hammer the economy.” “Stocks will fall.” “Recession looms.”
Wall Street insists that King Dollar is bad. It is wrong.
This falsehood is a near cousin to the idea that falling energy prices will wreck the economy. Also wrong. Energy will slow, but the rest of the economy will benefit.
In fact, the rising dollar, a key factor in the oil-price plunge, provides a double tax cut for the economy. Both will also promote world recovery.
Over the past year, the dollar has appreciated about 20 percent. So what happened? The S&P 500 is up 11 percent and the American economy has actually improved. While the underlying economic-growth rate is still a soft 2.5 percent, real GDP was up 3.5 percent or more in four of the last six quarters. And nonfarm payroll jobs have increased 3.3 million in the past 12 months, much better than the 2.2 million jobs gain of the prior period.
And the inflation rate is nil. The consumer price deflator is flat. Import prices for the 12 months ending in February are down 9.4 percent. And finished-goods producer prices have slumped 3.4 percent.
What’s happening? The dollar is up and oil prices are down. The economy, jobs, and stocks are up, and inflation is down.
How could this be bad?
So let me dust off some of my golden oldies: King Dollar is a very good thing. King Dollar has far-reaching benefits that way offset any temporary small costs. King Dollar is pro-growth.
And if investors gain confidence that King Dollar will stay firm, global capital will flow into U.S. dollar markets. That means, according to investment strategist Jason Trennert, a strengthening dollar pays for a bit lower profits with stock-multiple expansion. Modest currency-conversion costs of U.S. corporate income earned abroad may temporarily translate into slower profits — at least in GAAP-accounting terms. But this is small stuff. Actually, most of that money stays overseas to benefit from lower taxes. And many companies, especially technology firms, have demonstrated shrewd hedging acumen to take advantage of the King Dollar trend.
Anyway, as a result of the strong dollar, every import that American companies use for their products — be it autos, computers, or mobile phones — is vastly cheaper. And when products are finished in the USA, figuring in lower domestic-wage demands and interest rates, cheaper U.S. products will lead to stronger exports because of a sound dollar.
Remember Japan in the 1970s and ’80s, when the yen was running over 300 to the dollar (today it’s 120) and the country was a massive export machine? There you go. A strong currency leads to cheap exports from lower interest rates, zero inflation, and strong competitiveness.
In fact, the King Dollar/plunging-energy-price combination has substantially reduced the cost structure of American businesses, making them more competitive. And at the same time, the buying power of consumer incomes is significantly increased as prices for energy, food, and virtually all goods and services have dropped.
And as economic editor John Tamny puts it, “When investors invest, they’re hoping to get back the dollars they invested, plus an additional dollar return.” Tomorrow’s dollar should be worth the same as today’s. That’s the confidence value of currency stability.
How about some more history?
Between 1982 and 2000, as the dollar increased 178 percent, King Dollar (with lower tax rates and lighter regulation) presided over a stock market gain of 1,099 percent, a jobs increase near 40 million, and 3.5 percent average annual real GDP.
During the recent dollar decline period, from 2001 to 2011, as the dollar fell 25 percent, jobs increased a paltry 2.3 million, real GDP growth averaged less than 2 percent, and the S&P gained a measly 15 percent.
And don’t forget the dreadful 1970s: The dollar plunged, the economy suffered through years of stagflation, and the real value of stocks fell significantly.
Yes, the world’s currency system is in disarray. Europe and Japan are depreciating (won’t work) and the U.S. is appreciating (nurturing growth). Yes, we need a new monetary system. Yes, we need better currency and policy coordination.
In any event, as the Fed slows its accommodation, and while pro-growth corporate tax reform is in the air, King Dollar is on the rise.
Stop whining, folks. It’s a good thing.
Published in Economics
this is one of those economic things that I’ve always just made intuitive sense to me.
Let’s not mistake a strong dollar for a sound dollar. A currency that is not backed by anything and can be printed in infinite quantities is by definition not sound.
The dollar is currently strong because other central banks are debasing their currencies even worse than has the Fed – most recently the ECB. It is in demand not because it is sound but because it is the lesser of all evils.
But we would not have been able to accumulate – or continue accumulating – the level of debt we have with a sound dollar. That, of course, was the whole point of removing any link of the dollar to gold. And it’s also the rub. A strong currency is great if you are not in debt. If you are in debt – as we are massively so – a strong currency makes that debt all the more difficult to service. Right now we are in a sort of honeymoon – zero percent interest rates, enormous and increasing debt, yet the dollar is strong. It’s an inherently unstable situation and something’s going to have to give.
This Post is a counter to the classic Keynesian belief that the goal of the economy is not to produce things, but rather to put everyone to work. Thus, the Keynesian solution is for the government to hire people to dig holes and fill them up again. How sad that, after decades of Keynesian failures, it is still necessary to point out the absurdity of this belief. Things are bad when stating the obvious is necessary. Things are worse when stating the obvious is futile.
Working on the basic principle that the world revolves around me, I’d say: Go Dollar Go. If it actually gets to parity with the Euro (doubt it, but a girl can dream), I won’t need a raise.
Strange thing, though, is that I don’t yet have confidence that the dollar will stay firm. I’m just not sure what these currencies are measuring. If I understand your argument correctly, it’s “If the US shows confidence in the dollar, the whole world will believe it–to the point that it becomes warranted confidence.”
That may be a crude way of putting it, but is that basically right?
And if it is, it seems plausible to me on intuitive grounds–superpowers with a superreputation for superwealth and superstability can be superconvincing when they want to be. No one would be hugely surprised to discover that the dollar is King. It was the discovery that it might not be that came as the shock during the dollar decline period (which you’re already consigning to history, but I’m not so sure.) So if we tell the whole world our Mojo’s back, maybe they’ll believe it.
Or maybe they won’t trust us quite as much this time. Maybe they’ll want to wait a bit, look at the evidence, see if we’re all that stable, politically, think long and hard about that debt problem. Maybe we’ve made enough mistakes that global capital is never going to trust us quite the way they did before. Maybe it will take a long time to earn back that trust–and maybe we need to think about what other signs we’re giving before we get too confident.
Exports are 13.8 percent of GDP. Imports, 16.52%. That’s a big part of the economy, for sure. Not as big as health care, mind you: 17.9 percent of GDP. And our debt of is equal to 61 percent of GDP.
I’m not saying that confidence and reputation are immaterial here–believe me, that’s pretty much all I’ve got going for me, financially speaking, and I’m counting on it to work. But if I’m global capital, I might not be convinced yet that we’ve got our mojo back and our house properly in order and that we’ve got it for good.
When last I asked BofA if they might like to extend my line of credit, they said, “OK, but only little bit.” They’re reasonable: They’re looking at my track record. I figure they think, “worth a chance, but not too much of one.”
Not sure that we can pull it off on mojo alone, but I hope you’re right. If anyone can, we can.
Living in Japan, I am a HUGE fan of King Dollar.
The shorter way to put this is “fiat currency.” The even-shorter way is “con game.”
The only thing worse than winning a dishonest game is losing one. Yay, Dollar!
Completely agreed: if the deck is going to be stacked, you’d bloody well better be the dealer.
By the way, if you’re reading this thread, please drop everything and read:
Currency Wars: The Making of the Next Global Crisis
The Death of Money: The Coming Collapse of the International Monetary System
Please look past Mr. Rickards’ tendency to credential-burnishing and purple prose. He marshals a great deal of information and thoughtful analysis in these volumes. For someone who clearly understands the relationship between information and the economy, his skepticism about cryptocurrencies is a little surprising, but in the end that skepticism may be warranted on sociological, rather than technical, grounds (which would also validate the Austrian economic definition of “money.”)
Highly recommended.
Short answer: no.
Long answer: no.
A unit of money is simply a means of transmitting information. There is no…logical…or practical reason, why it should be “backed” by anything.
If the entity which is issuing the units of money doesn’t do it’s job and prints “too much money”, then the information on that will be captured by that unit of money anyway: i.e. the prices adjust.
The US isn’t even remotely “debasing” its currency. Inflation is at lower levels than anyone alive today can remember.
In fact, the argument can easily be made that it’s too low, and we need more inflation.
Cost of debt is at all time lows.
Nope.
Speaking of con-man. The author is a con-man of monumental proportions.
But, then again, doomsayers of his sort usually are.
Inflation is nil? Maybe according to government statistics but not out here “on the ground”.
The dollar is valued highly precisely because of the reasons that all the Ron Paul, gold-bug, Mises.org types think the dollar is being destroyed. :) (what’s surprising is that those people never understood what their own…prophets…said. I.e., specifically Hayek. But then again, I’d be surprised if they ever read any of Hayek’s actual economic work, but probably only read “the road to serfdom”, which isn’t an economic book)
So you have 2 options:
1) The entire world and every human being in it is wrong.
2) Ron Paul and the gold bugs are wrong.
Not a hard choice.
The dollar is strong, not only internally in the US but in relation to other currencies, precisely because of the actions the Fed took. I.e., they demonstrated that they had the capacity and ability to stabilize and control the value of the dollar, and maintain long-term stability.
And they had the ability to do this much better than other country’s currencies.
The one thing the market likes about currencies is…stability. Stability in a currency allows for long-term predictability. That’s why US debt is so cheap: everyone wants some, because it’s the safest investment out there.
Now, this has nothing to do with “superpowers” etc. The British currency, the Swiss currency, the German currency, the French currency etc…were all at one point or another in the last 50 years (and to some degree still)…similar currencies.
An easy way to think about this: it’s like buying shares in a company. The US is the largest company in the world, the most diversified company in the world, and one that has maintained stable returns the longest.
As an investor, you can buy lots of stocks from any company. Some companies will offer you higher returns than others. But everything has to be risk-adjusted. A small non-diversified company is highly risky. In the real stock market, you want this, because you can buy the entire stock market and reduce the risk.
But when it comes to countries, the equivalent of “buying the market”, is to buy US debt (i.e. currencies). You diversify away the risk.
There’s…millions…of people who use the “government statistics” on a daily basis to make important decisions. There’s tens thousands of people who study and research those statistics on a daily basis. All the way from the lowliest economics student, all the way to the highest paid investor on Wall Street.
One would think, after a while, someone would have caught on to the fact that inflation numbers are supposedly manipulated by the government.
If someone figured that out, you can imagine, there’d be some very serious, very serious, money to be made :)
Yet, all the supposed “discoverers” of this massive government conspiracy to defraud the American public, publish their amazing revelations on websites like Zero Hedge etc. :) Weird. Why do they tell us this information, instead of keeping it private and making a few…billion…dollars from it?
PS: Now, of course, no one assumes that the CPI is a…100% accurate measure. It’s a proxy. And it’s by far not the only proxy, or the one that the Fed is even most concerned about when looking at inflation.
Sometimes CPI overstates, sometimes understates. It’s a proxy. As of right now, the “billion price project” says the CPI figure are…over-stating inflation by 0.3%. But then again, the “billion price project” has it’s own weaknesses. So everything is a proxy, and nothing is accurate.
There’s obviously more accurate measures out there. And by far the most accurate measure…is market price.
You really should read Rickards rather than dismissing him. You might learn something about the history of money – one of the functions of which, until recently, was as a store of value. You are quite right that this is no longer one of the functions of money, as far as the Fed and other central banks are concerned. That’s just too bad for anyone holding dollars in a savings account thinking they can preserve their wealth that way.
Of course it is. The Fed is printing money and giving it to banks for free! Why would your bank pay your grandmother 5% interest on her savings when it can just go to the Fed and borrow as much as it wants for nothing? This is why seniors, who planned on a normal 5% return on their savings in retirement, are having to go back to work because they are only earning 1%. You don’t get a free lunch by printing money. You just stealthily transfer wealth from savers to debtors.
Unfortunately, merely saying “nope” doesn’t change the fact that zero percent interest rates, ballooning debt, and a “strong” dollar is not a stable situation.
By the way, merely because the CPI isn’t reflecting inflation doesn’t mean the Fed’s easy money isn’t inflating prices. It’s just not happening in consumer goods, because that money isn’t making it to consumers (wages are flat). Instead, that hot money is flowing into the stock market and generating record equity prices – just like the hot money went into real estate in the 2000’s. How did that work out? This will end the same way. We never learn.
I most certainly won’t be reading Rickard’s trash, when I can go watch Peter Schiff’s youtube videos and get my comedy fix that way.
Why would anyone think that putting your money in a savings account is a good idea? Since when?
No, cost of debt to the US government: i.e. government bonds.
Why did grandma think that putting money in a savings account was a good idea? Since when? Grandma never heard of an IRA?
The strength of the dollar is determined in relation to other currencies. That isn’t likely to change anytime soon.
High levels of debt are caused by low interest rates. If debt is cheap, you get more of it. Low interest rates are caused by high demand for debt. I.e., it’s a circular argument.
Yes, of course, they won’t last. But so what? The rate will go up by 1 percent over the next few years, and no one will care in the slightest. It will still be pretty much the same story.
Low interest rates are caused by high demand for debt? Interest rates are the price of money. If demand for debt is high, interest rates should be high. The price of anything should go up when demand goes up – in an honest market. The only other way for demand to go up is for the price of something to be held artificially low – then people will buy it because they know they are getting a bargain. And when you set the price to zero – as the Fed has done with debt – naturally the demand is going to go through the roof. Who wouldn’t want to borrow money from the Fed for free and play the stock market with it? Especially if you are a “too big to fail” bank and you know the Fed is there to bail you out if your investments go south.
Grandma thought putting her money in a savings account was a good way to preserve her wealth because, when money was sound, it was. But I agree with you that Grandma was a sucker to continue doing so when the dollar became pure fiat. Hey, she’s just got herself to blame, right?
Why? Supply has nothing to do with it?
Who says it’s artificially low? You do.
Of course, the whole thing is “artificial”. But that’s precisely want we want: that’s how you keep…stable…monetary policy.
The thing that some of these “Austrians” (they call themselves that, even though they have nothing in common with Hayek or the rest of them)…don’t get, is that there’s a supply and demand for money.
The way you keep stability, is to change supply when demand changes. If you don’t change supply, you get wild swings in prices.
Why is getting wild +30 to -30 % swings in inflation a “good thing’? That’s what happens when your value is pegged to something you have no control over…like “gold” (or sheep, or rocks, or whatever you want)
You want to talk about “grandma”? How’s “grandma” going to be able to survive if the inflation swings by 60 points from year to year?
This is just the usual rhetoric we’ve heard a million times, but which is devoid of connection to the reality.
The Fed’s job is to maintain price stability, which it has done in a splendid way, given the alternative of a massive deflation.
Of course, this has helped…everyone. That is, everyone who invests money, or who works for anyone who invest money. I.e., everyone.
When was “money sound” again? When it used to swing by 60 points from year to year back in the good old days of gold?
Yep.
Those interested in modeling either historical economic trends or the predictions of different models may wish to investigate the Kingston Lectures on Endogenous Money & Modelling with Minsky. Minsky is dynamic simulation software explicitly oriented toward economic modeling. The really interested may wish to purchase A monetary Minsky model of the Great Moderation and the Great Recession. It’s encouraging when a modeling approach can reproduce both the “equilibrium” conditions (the Great Moderation) and the collapse (the Great Recession). Prof. Keen, author of Debunking Economics, also has numerous YouTube videos explaining how to use Minsky for various purposes.
Full disclosure: I contributed to Minsky’s Kickstarter campaign.
AIG, you’ve shown that graph before. Notice that inflation in the 19th century – the period of the greatest economic growth in history – nets out to about zero over the century. A dollar in 1800 was worth about what it was in 1900. That’s what sound money does, it functions as a store of value. I’m guessing that the big spike after 1850 was the Civil War. I’ll take the 1800-1900 period of the graph rather than the 1900-today part any day. I can hold on to my money and ride out any short term volatility in the knowledge that my savings aren’t being gradually evaporated. And the volatility isn’t actually that big. Take out the Civil War and it’s not bad at all. That’s something grandma can handle.
Nowadays, we both agree, grandma is a sucker if she tries such a thing. She’s got to play the market, gamble in real estate, find some yield somewhere to hold on to her savings. If grandma doesn’t want to spend her life trying to guess what bubble the Fed is going to inflate next, too bad for her. I guess you think this is OK, I find it an appalling betrayal.
That’s a fascinating statement. The thing you have no control over is the dollar. It’s controlled by an independent bank precisely so that it is immune to the political process – i.e. so that you and I will have no say in its value. It’s value is whatever the central bankers determine it will be. That’s the whole point – since they can print dollars for free, they can push around the supply/demand curve how they like (you don’t seem to be grasping this point).
I have a heckuva lot more control of an ounce of gold in my hand (why do you use scare quotes – “gold”?) than I do a paper dollar. Why you think a central bank gives you control over the value of the dollar baffles me.
I read a fascinating argument that we are exporting our inflation.
Recall the “Laffer Spike”, which was us expanding the money supply more rapidly than ever before, by a factor of five — aka printing money, aka quantitative easing. Article here http://www.wsj.com/articles/SB124458888993599879
So it was reasonable to anticipate wild inflation. Not a guarantee, but there was certainly reason to expect it.
The problem is that there are still an awful lot of dollars out there, still acting as an IOU. To say A) that the money is unbacked and therefore not real, or B) that it is cheapened through oversupply and therefore of little use, is close enough to saying the same thing for me.
What will happen to all those dollars over there? The global economy now looks primed the same way the Japanese economy was in the 1980s. All fine until the levers themselves begin to break under the weight of all the leverage.
Most ably and convincingly articulated by David Stockman.
By the way, anytime anyone responds to observations about inflation by citing the CPI and leaving it at that, grab your wallet: you’re dealing with a charlatan, a fool, or both.
1) The period with the greatest economic growth in history is the current 50 years :)
About double what it was in the period you describe. So there goes that theory.
2) So you’re saying that after 100 years, you’d get back to where you started, but only after fluctuating by about 60 points, on a year to year bases. Sounds like a fun roller coaster.
How does it “store value” if it fluctuates by 60 percentage points?
And pray that you have nothing to buy or pay for during the times of huge spikes :)
You see now why people kept their money…in their mattress?
You’re clearly looking at a different graph then.
Yeah. What’s your point?
I grasp it quite well. It’s what I want them to do.
Oh I get it. The word “you” and “your” confused you. I meant “you”, not “you”. Why would I want “you” to have control over money?
You mean like David Stockman, the guy charged with fraud? Or like the previous author your recommended, who goes around telling people he works for the CIA?
BTW, no one has answered me yet how it is that this amazing information that the government is fraudulently misrepresenting inflation…hasn’t led to the discoverers of the fraud earning a few billion dollars as a result of it?
Or, at least, a Nobel Prize in something. Instead, they have to content with cheesy science fiction novels about the coming apocalypse, and blog posts on Zero Hedge.
An over supply would imply an…over…supply. Just because you think it’s an oversupply, doesn’t make it such.
Inflation is at all time lows. Hence, it’s an….under…supply.
Anything else, other than demand, you mean?
1) That’s kind of how it works every time someone buys something in dollars. They trade their goods for dollars.
2) What do you mean the money is not “in circulation” or “sequestered”? What did China do with the dollars? Bury them? Burn them? Eat them?
If only!
They bought US bonds and stocks with them. And invested in FDI into the US with them.
China’s FDI into the US is nearly 10 times bigger now that it was in 2007.
Oh well. There goes that theory.
Yes, the David Stockman who talks about his past in his book, among other things.
And Jim Rickards has consulted with the CIA and the Pentagon.
Now, do you have an actual argument, or just more ad hominem?
Because when all currencies are inflated by their governments and you don’t have inside information, it’s far from clear what sorts of arbitrage opportunities are available to you. As for investing in commodities that have historically been money, in some proportion it’s a safer bet than dumping it all into stocks based on the “wealth effect.” When currencies collapse—and remember, the U.S. dollar already did once, leading to Carter Bonds denominated in Deutschmarks and Swiss Francs—silver and gold are money good, period, the end.
So please leave the U.S. economic cheerleading to the touts on MSNBC. The smart money’s not buying.
AIG, do you contend that the majority of greenbacks have been “repatriated”? In exchange for what? If it’s all IOUs then how is the payment sound? We buy Chinese goods with promises of future payment, right?
We may moderate our risk by exporting it once again to the Chinese, but that’s less than a finished transaction.
Air France 447 stalled in from 40,000 feet give or take, and for 39,999 feet of that, there was nothing wrong with the airplane.
You wouldn’t. But that’s what freedom is all about.
The game in a situation where a central bank is loaning money to investment banks at no or little cost is to find out where that hot money is going, ride the wave, then get out before the inevitable crash occurs. Easy money only results in CPI inflation if that money makes it to the ordinary consumer; otherwise it results in an asset bubble somewhere. John Paulson figured this out and made a killing in the collapse of the housing bubble in 2007/2008. These days investment banks are taking free money from the Fed and putting it into the stock market. That’s why the stock market tanks whenever Janet Yellen hints that she might raise interest rates – it’s all about timing and cashing out your profits just before the music stops. The ordinary investor and his 401k will get screwed, of course, because he’s been buying mutual funds in the runup and will still be holding them when Wall St. dumps them. But somebody will time it right and make a killing.
If you use the easy way to think about things you may be taking a dangerous shortcut.
I’d argue that we’re in very new territory, here, historically. Attempts to model currency behavior based on 18th and 19th century events and definitions of “currency” may be useful. I reckon anyone who feels certain they’ve defined all the terms properly, no less chosen the most relevant data and modelled this well enough to make predictions beyond the next few months is probably getting a bit overconfident.
There are some very new things happening in the world.
When I hear phrases like, “How could this be bad?” I think, “Lots of ways. But it is not necessarily bad.”
When I hear talk about free markets, I think, “It is not a perfectly free market without free movement of labor.”
When I hear, “It’s controlled by an independent bank precisely so that it is immune to the political process,” I think, “No, it’s controlled by an independent bank so that it is immune to the political process in the short run. In the long run, as Keynes famously said, “everyone but me will die–you just wait and see, you’ll still be reading me in 2015,” and nothing is immune to political processes.” The missing questions here are what kind of political processes and over what time frame.”
When I hear about the extraordinary doom with which we’re confronted, according to the most sophisticated models we’ve got, I think, “I’ll read them when I’ve got time, but sounds like I don’t, so why bother.”
When I hear that “grandma doesn’t want to spend her life trying to guess what bubble the Fed is going to inflate next, ” I think, “Well, that’s why grandma and the Fed are in collusion. Grandma votes, and she keeps getting older and older. You aren’t allowed to kill Grandma, so how do you reduce entitlements? No one votes for the guy who says, “I’d betray my own Grandmother,” and I’ll bet you no one wants to be the guy at the Fed who does it in an immune-from-the-political-process way, either.
If you want to know what I feel, my behavior is probably a good guide to my prejudices: I think it still makes sense to try to sell goods and services in the US and be paid in dollars. You can tell I feel this way, because I’m doing it. But of course I would, I’m American. I’m a data point, not data.
What I expect to find when I study the literature closely on this one is:
a) Lack of rigorous definition of the terms;
b) Inability to select the most relevant data;
c) Lack of data;
d) Incremental progress at modelling this, at best.
What I want to happen is for the dollar to keep going up. That’s great for me, short-term.
Anyone who tells me it is great, period, long-term, is running up against my prejudices, at best. I’m still uneasy about the idea that you can solve fiscal problems with monetary policy.
But let’s wait another decade and see.