Posted on 09/21/2014 9:20:27 AM PDT by Kaslin
Co-written by Stephen Moore
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 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.
I understand this. I just do not understand how after years of QE we are not seeing inflation.
Can someone explain that to me as if I were stupid?
Back in 2000 and when it became cash currency in 2002 the euro was around 0.8 to the dollar. Even after the PIIGS calamities etc. it is now still about 1.30 to the dollar. Europe is supposedly dead and done (I read it right here) but the euro is strong. Why?
That is very true
Strong dollar is not the 0bummer plan...absolute fluke or simply as result of all informed citizenry in spite of commie crap and 0bummer glazed eye pothead and gubmnt dependent zombies.
Been to the grocery market lately? Damn inflation is everywhere. Bought a box of crackers and found the package is smaller and yet it cost more than a year ago. Packages of potato chips are bloated with gas and the quantity of chips less. On and on. Where in the hell have you been?
“QE ends next month.”
Is this true?
5.56mm
Obama has nothing to do with it.
Obama has been intentionally trying to kill the dollar as part of his ongoing Operation Take America Down A Few Notches.
What Obama did not allow for was fracking and the massive oil and gas boom fueling the American economy , despite Obama’s best efforts to kill both the oil and gas industry and the American economy in general.
In a world where America imports 80% of it energy, a collapse of the dollar America's worst nightmare and economic Armageddon for our country.
In the current scenario where America has developed it's oil and gas reserves to the point where it soon can be energy independent and net major petroleum exporter , the collapse of the dollar is the rest of the worlds worst possible economic nightmare and a massive boost to American employment and the economy as whole.
If you want to know what Obama is all about, look to his attempts to stifle and kill our oil and gas industry.
It’s another in a series of false recoveries. The Obama/liberals’ policies are still in place, which is what my point was, and no monetary policy of any foreign country is going to fix them for us.
The answer may be that “money” that is NOT in circulation does NOT effect prices. For example, $1000 buried in a can in my back yard doesn’t “compete” with money in the market to inflate the price of anything.
But....
If people start to think their fiat money is LOSING value, then that invisible, idle money will start to rush into the market to buy SOME commodity (ANY commodity?) to “preserve its value”.
I hope I can move fast enough when TSHTF.
The answer may be that “money” that is NOT in circulation does NOT effect prices. For example, $1000 buried in a can in my back yard doesn’t “compete” with money in the market to inflate the price of anything.
But....
If people start to think their fiat money is LOSING value, then that invisible, idle money will start to rush into the market to buy SOME commodity (ANY commodity?) to “preserve its value”.
I hope I can move fast enough when TSHTF.
We are not in a recovery, nor will we be until Obama is out of office and his insane lack of leadership and destructive policies have been reversed.
We are currently fighting valiant economic rear guard defense against an Obama engineered economic collapse led by the Obama Administration's intentional policies of destruction of the dollar.
Ironically, the sudden rise of the American oil and gas boom has run the people at home and abroad who wish the destruction of the dollar into a flop sweat panic and their plans to run the dollar into the ground are backfiring on them.
They are now working as hard as they can to support the dollar to prevent their own economic destruction by an energy independent America with access to cheap petrochemicals and energy combined with a massive favorable currency exchange rate advantage.
This even trumps to some degree our massive debt loading because such an economic advantage removes doubt about America's ability to service said debt.
My father says it took Carter to get Reagan.
I said we clearly didn’t learn that lesson, since Obama got re-elected.
Actually, I just returned from the grocery store. You are, of course, correct.
Yes the Fed has been saying that tapering would completely wind down asset purchases in October for a while now.
I was born in 1944 and I haven’t been the same since.
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