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For the most part,
the value of the dollar is given cursory attention by the financial media. Typically,
its movements are assigned an importance on par with much less determinative
metrics such as natural gas futures and construction permits. It's only when
major milestones are reached that anyone really takes notice of the dollar. We
are living through one of those times.
The great dollar
rally of 2008-2009 has come full circle. When the financial crisis exploded
in its full ugliness in mid-2008, the dollar, which had steadily declined
over the previous four to five years, put in a rally for the record books. By
March 2009, as investors across the world sought safety from the financial
storm, the index had surged more than 25%. Since then, the dollar has
steadily declined to the point where nearly all those gains have vanished. In
short, the panic rally has given way to the long term trend.
So, as the dollar
index makes fresh 52-week lows on a nearly daily basis, discussion on the
greenback is heating up. And while real insight on the topic is hard to find,
the debate centers on the battle between two conventional opinions - both of
which are wrong.
The first camp,
which is generally supportive of government intervention in the economy, argues
that dollar's decline is a positive for both the economy and the stock
market. The second camp, which tends to fall on the more conservative end of
the political spectrum, views the dollar's decline as a problem but feels
that tough talk and slightly higher interest rates are all that is needed to
restore 'King Dollar' to its throne.
First of all, a weak
dollar is no better for Americans than a lower paying job is for a worker. And
although I would prefer that the dollar remain strong, I know that currency
values are a function of supply and demand, not wishful thinking. The past
years of reckless monetary and fiscal policy have created conditions that
must push the dollar down. Vastly expanded debt levels and monetary expansion
have created a greater supply of dollars, while poor investment performance
and diminished industrial capacity have lessened the demand for dollars.
The regrettable
truth is that while the weak dollar will help rebalance the global economy,
it is not a panacea for the U.S. The fall is no more worthy of celebration
than a student celebrating falling grades on his report card. If the dollar
does not recover eventually, Americans will suffer diminished living
standards. To avoid this we must make difficult reforms now. If we continue
our current policies, we run the risk of a complete dollar collapse. Far from
helping to solve our problems, this would be a true nightmare scenario.
On the other side of
the argument, those who correctly equate a weaker dollar with a weaker
America mistakenly believe that mere posturing by officials or trivial rate
hikes would be sufficient to restore the dollar's lost vitality. We are long
past that point. The best we can do now is to accept the penalty of a weaker
dollar as punishment for our prior failures, and start building for the
future.
To save our
currency, the Fed must get very aggressive with interest rate hikes and reign
in the supply of dollars that have flooded the world over the past few years.
The federal government must also do its part by cutting spending, which means
no more stimulus and no more bailouts. Undoubtedly, these actions will have
unpleasant economic and political consequences. A student who studies harder
may have to miss a party or two. A simple analogy, but unfortunately it is
that simple.
Even in the unlikely
event that our political leaders take these courageous steps, the near-term
trajectory of the dollar may still be uncertain. A dollar rally that results
from higher interest rates and a narrowing federal deficit may soon fade as
the recessionary forces that such moves would unleash act to weaken the
dollar once again. But at least we would be building a foundation upon which
the dollar could eventually find some footing.
With a restructured
economy, higher savings, more capital investment, lower government deficits,
and higher interest rates, the United States would once again attract
international investment. Funds would flow here not out of fear, as they did
last year, but out of confidence. The dollar's strength would not rest on the
willingness of foreign governments to buy our debt, but the willingness of
foreign consumers to buy our products.
Only then could King
Dollar regain its throne.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
Also
by Peter Schiff
For a more in depth analysis of the tenuous position of
the American economy, the housing and mortgage markets, and U.S. dollar
denominated investments, read my new book : The Little
Book of Bull Moves in Bear Markets" (Wiley, 2008).
More importantly take action to protect your
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