Investing in the U.S. Dollar
Strong Dollar, Strong Country
After a surge during the financial crisis, the U.S. dollar has resumed its trend downward. Many applaud this weakening as a way to spur exports and economic growth.
I cannot overstate how strongly I disagree with this position.
“Strong dollar, strong country” is more than a mantra for me. Economic history indicates that no country has ever achieved greatness, nor maintained it, by debasing its currency.
Meanwhile, have you ever heard of a country in deep economic trouble because of a strong currency? In short, the value of a nation’s currency is a reflection of the perceived value of the country in the global marketplace.
The Case for a Strong Dollar
While global markets will determine the value of the dollar, America’s economic policies, as well as public statements by key officials, will impact how markets will weigh the greenback in the future.
A weak dollar policy undermines U.S. competitiveness, job growth, standard of living, capital investment, share prices, and our ability to finance our public debt.
And a weak dollar in general harms even more...
First, a weaker dollar translates into a cut in the real spending power of American consumers — in effect, a reduction in real income.
This is one reason Switzerland has the top ranking for the highest density of millionaire households. Dollar millionaire households account for 6.1% of all households due to the strong Swiss franc.
Meanwhile, measured in euros, American real per-capita GDP is down more than 25% since 2000.
Second, a weaker dollar diminishes the role of the dollar as the world’s reserve currency. Why should investors and central banks around the world invest in U.S. assets when the dollar's value is steadily declining?
The world’s fifth-largest pension fund will no longer buy U.S. Treasury bonds because yields are too low. The move signals what could be a big shift by financial institutions away from U.S. government debt and into higher-yielding assets.
South Korea, whose National Pension Service has $220 billion in assets, is just one of many countries that wants to broaden its range of overseas investments.
Third, during a time when the American consumer is cutting back, attracting international capital investment by private companies will be crucial in financing innovation, entrepreneurship, and badly needed infrastructure which will, in turn, spur economic growth and employment.
With interest rates at or near zero, we need every incentive possible to attract the capital necessary to finance our ballooning public debt.
A weak dollar also undermines American jobs and industry since American companies have an incentive to borrow in dollars and use the proceeds to invest in overseas plants and equipment. A weakening dollar encourages capital outflows.
Global investors have increasingly borrowed in dollars and used the proceeds to invest overseas in higher-yielding, faster-growing stock markets that have stronger currencies.
Fourth, the argument that a weaker dollar will lead to a sharp reduction in America’s trade deficit is highly unlikely, since 40% of the current deficit is due to oil imports, which are denominated in U.S. dollars.
An additional 20% is due to trade with China, which has its currency pegged to the dollar.
A weaker dollar hampers marketing efforts by American companies in strong-currency countries because marketing expenses become prohibitive. Even if a weaker dollar gives a bump to exports in the short term, like a drug, it wears off, and we have to start all over again from an even weaker position.
Business leaders also know that discounting prices may spur near-term revenue and profits but at a real cost to long-term profitability, not to mention the risk of damage to the brand name. And this is what we are doing to the brand of America when we try to increase exports by lowering their price in the global marketplace.
Better to stand firm on price and sell into global markets on the basis of what is great about American products: superior quality, innovation, and service.
Lastly, a weaker dollar is inflationary, since it increases the cost of imports. Just look back to the U.S. economy during the 1970s — ugly stagflation and markets going sideways year after year.
The value of a nation’s currency is a reflection of the market value of the country in the global marketplace. Maintaining and strengthening the value of the U.S. dollar is in the national interest — the best interest of American consumers, businesses, and investors.
Until next time,
Carl Delfeld for Wealth Daily
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