Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
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
Interesting that PGM’s are undervalued while gold is overvalued, these days.
It certainly will hurt many indies in the exploration and production sector due most wells are drilled with money borrowed from Wall Street. These prices will stay low at least for a few years due oil production just to for debt servicing sake, as capital within the sector dwindles. What happens to prices with budgets for new exploration slashed and the slug of the glut is passed through the system?
Fascinating graph in comment 18. However it’s presented in a way which implies that the big swings in inflation just kinda happened. In fact, there is clearly a strong relationship between the highest and most massive spikes and wars. Excluding the colonial period, we have spikes for the Revolutionary war (and a related one in the 1790s?), the War of 1812, the Civil War, and the two world wars.
And then you have our current era with nothing but blue that corresponds to the massive spending and debt that underpins our current warfare/welfare state.
Or look at the chart this way. Between a few years past the end of the War of 1812 and the Civil War, and then especially between the end of the Civil War and WWI you have the gentle continuous deflation beloved of Austrians and regular people. That all ends with the Fed. Excluding the special case of the depression years, during the Fed years you have nothing but the continual devaluation of money that corresponds to continual growth in the size of the state.
Grandma had no say when Nixon severed the dollar’s link to gold in 1971. That is what permitted the phenomenal increase in government spending and spectacular rise in debt since then. It’s true that the spending was popular – but then it always is.
The average person doesn’t really know how money works or the significance of what happened when Nixon put an end to Bretton Woods. For them, a dollar was still a dollar and they did not recognize that it meant something entirely different in 1972 than it did in 1970. Does this excuse politicians and central bankers from using this ignorance for short term political benefit, taking advantage of the fiat nature of our currency to fund social programs with debt, even if such policies are popular? Our system can only work if those in power show some measure of principle, and don’t do things merely because they can get away with it.
The younger generations seem to forget just how new a pure fiat currency system is. It’s only 41 years old and is historically unprecedented. We are running a global financial experiment the consequences of which will be, well, no one really knows. But the danger of such a system has long been recognized: Governments will not be able to resist the temptation to pay for popular social programs with debt, trading long term problems for short term political benefit. And here we are. The national debt was $400 billion in 1971 (less than our current annual deficit) and is $18 trillion today. Is Grandma to blame for this? I don’t think so… she’s not sophisticated enough to know what happened to the dollar in 1971, but there people in power who did and allowed it to happen.
Fact check. Yen at 300 to the dollar made it much weaker than it is today. That whole paragraph is a non sequitur
Yea AIG, millions of people voted for Obama also and there are tens of thousands that study global warming. Many have figured out the falsity of our government just not you. Many are making millions. I am not doing bad myself. Yes there is inflation ,it is hardly nil.
To All & Larry,
Sorry for being so late to comment on this post.
I think it is interesting that we go from extreme to extreme in this. After WWII artificially raising the dollar was part of the Martial Plan. By intentionally doing this we were subsidizing the rest of the World’s economy. This was well justified at first. Immediately after WWII. Europe, Asia..etc was in a shambles. By the 1960s, however, Europe and Japan were doing just fine. Our economy started to seriously slump in the 1970s but we continued to maintain the artificially high dollar policy anyway. Jimmy Carter saw stagflation and US Industries being murdered by Japan Inc. He didn’t budge on the artificial high dollar. Finally, Ronald Reagan came in and let the dollar float. Not a low dollar policy but a neutral dollar policy.
The association with losing the Marshall Plan (justified) with an expanding American economy was unfortunately conflated by the likes of Paul Krugman into another magic panacea. All part of the infinite Keynesian gravy train. This was the start of artificially making the dollar low (unjustified) making the rest of the World subsidize us.
Back to the Reagan neutral dollar I think is the sensible policy.
Regards,
Jim