Posted on 09/20/2014 6:15:31 PM PDT by SeekAndFind
Maybe the U.S. economy, a weakling for the last six years, is finally starting to flex some muscle. We’re referring to the return of King Dollar.
For those who haven’t been paying attention, the greenback is in the midst of a rally not seen since the 1990s. It’s racing past the euro, the yen, and other currencies. Investors worldwide are buying the equivalent of stock in America, Inc.
If the rise in the dollar’s valuation is sustainable, it’s welcome news for the stock market, for fighting inflation, and for U.S. growth prospects. Ronald Reagan said it best: A strong dollar is a sign of a strong America.
This has been a long time in coming. And it’s still too early to tell whether the trend will continue. But the dollar has rallied significantly in recent months. According to the Wall Street Journal, “the resurgent dollar has logged its longest winning streak in 17 years, rising against a broad basket of currencies for nine straight weeks.”
One immediate impact of dollar strength is that it increases the demand for U.S. stocks and bonds. But the dollar rally is also a restraint against inflation, as well as a market signal of U.S. competitiveness relative to rival nations. It’s a hopeful sign that Janet Yellen and the Fed may be more effective inflation hawks in deeds — though not in rhetoric — than commonly expected.
QE ends next month. And the Fed is expected to raise its target interest rate in 2015 and beyond. In any case, most of the Fed’s balance-sheet expansion went into excess bank reserves instead of circulating throughout the economy. In other words, Fed policy was never as loose as people feared.
Naturally, some will write off the bull market for dollars as merely a sign that the greenback is the least rotten apple in the barrel. But that’s not giving the dollar its due. It has been gaining strength against gold, which is the best measure of dollar value. At just above $1,200, gold has fallen back to early-January levels. And remember, gold peaked around $1,900 in mid-2011.
We think one key explanation for dollar strength is the amazing efficiency revolution in American business that’s taken place over the last five years. U.S. companies have become the best run in the world as they’ve ruthlessly cut costs.
Credit also the drilling bonanza in oil and gas, which is driving down energy costs for American producers of everything from steel to auto parts to microchips to chemicals to corn.
King Dollar also is a capital magnet. We’re already seeing this as foreigners flock to U.S. assets. The historical relationship is unmistakable. Periods of sustained economic growth and rising living standards are associated with a strong dollar. That was clearly true in the prosperous 1960s, 1980s, and 1990s.
And while the strong dollar restrains commodity prices, it acts as a tax cut for American consumers and businesses. Gasoline, for example, is down to $3.35 from nearly $4. The CPI is up only 1.7 percent over the past 12 months.
A strong dollar increases the purchasing power of the greenback. So the money in your wallets and purses buys more goods and services.
Conversely, when the dollar crashed in the 1970s — especially relative to gold — the economy collapsed into a crippling stagflation. From 1999 to 2009, the dollar index dropped by almost 40 percent, with only a brief surge between 2004 and 2006. The economy and wages were sluggish at best.
The relationship between a strong currency and prosperity is lost on the many nations that adhere to the mercantilist model whereby a devalued currency supposedly gives a country a competitive edge by making exports cheaper. Japan is the classic example of this failed paradigm. Its economy has crashed in recent months thanks to higher taxes and a yen intentionally weakened to boost exports. The Japanese seem to think that the way to grow the economy is to make their citizens poorer.
Of course, numerous policy blunders — Obamacare, high corporate taxes, carbon regulations, Dodd-Frank — are restraining U.S. growth and could derail the dollar comeback. But the rising dollar may be sniffing out new pro-growth policies in a Republican sweep come November.
In fact, the best growth combination would be slashing corporate tax rates to 20 percent, letting S-corp small businesses pay the lower C-corp rate, and ending the double tax on profits earned overseas. Then the Fed could start normalizing interest rates.
This approach would get the economy cooking again, without inflation. American workers would finally get real pay raises, while business investment and the stock market boom.
King Dollar is the ticket.
– Larry Kudlow is economics editor of National Review. Stephen Moore, a frequent contributor to National Review, is chief economist at the Heritage Foundation.
King Dollar? A fiat currency backed by the full faith and credit of an insolvent government. More like court jester.
bttt for AM good news
Real question: Gold is down, silver is way down, gasoline is down. Market forces or hidden forces?
If Kudlow is saying the rising market is betting on Republican control of Congress, that doesn’t sound like a bad thing.
I still see: http://www.usdebtclock.org, and it doesn’t make me smile.
Eliminate the corporate income tax. Give them their freedom-AND NOTHING ELSE.
Are they rushing TO the dollar for its prospects, or fleeing FROM worse prospects elsewhere?
Where else can you run when the Chinese bubble bursts?
These days there are no “market forces” as taught and known by generation of economists, businessmen, and stock market players. The “hidden forces” of the unholy alliance between the Fed and its TBTF banks, the various illegalities of High Frequency Trading, and various hedge funds are the “market forces” these days.
I recall how gasoline dropped from the very high $3’s to $1.69 in a matter of months, nearly without a break, back in 2008, ending on the very day of the election. Goldman Sachs stepped up eventually and said, yeah that was us, we jiggled some percentage requirement for Unleaded Gas in one of our big hedge funds, so everybody had to sell it by the ocean liner full for months.
This is one "statistic" that shouldn't quoted. It is as bogus as the global warming hockey stick.
It’s our huge military.
When there’s no growth it’s ‘safety first’ for investors.
What about the continued drop in gold & silver quotes?
I’m a keen student of the 1920’s hyperinflation in Germany. I have some umpteen million Mark notes handed down by family who fled.
Germans who possessed gold merely stepped across the border & turned it into Swiss francs or British pounds, which circulated in Germany & made the Mark even weaker.
How explain the drop in precious metals?
Larry Kudlow bump
It has nothing to do with the GOP in November. Right now the US is the cleanest dirty shirt. China is going down, EU is going down. In a year or two, China or the EU might start to look like bargains, and then that’s where the money will go.
The real issue isn’t the incredible value of the dollar.
The real issue is what other currency is better?
If we got the Pres__ent _resident out of there and a real Conservative in, this nation would explode with economic activity, a return to full employment, and a paydown on the nation debt.
The gold and silver prices you see are paper contracts for the precious metals, not physical possession of the stuff. Contracts are being used to manipulate the market. Let’s say JPM sells the same ton of gold to a 1,000 different buyers with no one expecting to take delivery. Pretty easy to manipulate the price by creating nonexistent gold out of thin air for 999 buyers.
For similar hocus pocus, look at the Alibaba IPO on Friday. Goldman Sachs and other major players on Wall Street made a killing selling stock in a Chinese website that’s known for counterfeit goods. However, it wasn’t even stock in the company. Investors bought for $93 a share stock in a shell corporation with a P.O. Box in the Cayman Islands. The shell corp has a contract to receive Alibaba’s profits. After all, surely one could expect the ChiComs to honor this contract.
This type of organized crime gets you put away for life. On Wall Street, you get an eight-figure bonus minus your campaign donations (bribes) to continue operating.
When I saw “king dollar” I knew, Kudlow was involved.
I listen to Kudlow regularly, and over the years I’ve heard several economists and investment gurus say on his show that the price of gold is really a measure of insecurity. The market value goes up when investors are nervous, and down when they are confident.
Don’t know if the same is true of oil but I could envision the price of gas at the pump going down as the market responds to a growing economy and increasing consumer confidence. Gas at $3.50 / gal would be fine if we were all earning $100K / yr but salaries haven’t kept up with market prices, and that’s the real problem.
That’s why bars of soap and boxes of cereal keep getting smaller while the price stays the same, because supermarkets know their regular customers haven’t been able to increase their weekly grocery budget, while the costs of manufacturing have gone up. So they compromise.
Also the economy will improve if there is some healthy inflation, which we’ve been lacking for years (knowing I’ll get flamed for saying that). But inflation is a sign of a growing economy, because when there are more dollars in circulation, each one is worth a little less. I think that’s what Kudlow means by “King Dollar”.
Note that flooding the economy with fiat dollars is a failed attempt to do that artificially. Raising interest rates is a real solution, because it gives each dollar more earning power and will lead to natural growth, unlike this artificial stimulant QE infinity nonsense. Also corporate bailouts when bankruptcy (such as for GM and some of the major banks) would have been healthier for the economy. Kudlow has explained all these things many times.
But rewarding failure is the “in thing” these days. Just ask Jon Corzine, who was paid millions of dollars to leave Goldman-Sachs, or Conan O’Brien who was paid $45M to leave the Tonight Show.
And lest we forget, the Facebook pump-and-dump.
"Just 3 months ago, as Americans celebrated Memorial Day, the spot price of gold jerked $20 higher (then plunged) as gold futures closed. Today, as Americans celebrate Labor Day, the liquidity-less market for spot gold just dropped $6, ripped back and settled lower in the space of a few minutes (with bids and offers fully crossed for a few minutes) as someone clearly forgot to tell the machines that the market is closed..."
Someone Tell The Gold-Manipulating-Machines The Market's Shut
Bingo!
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