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.
Way to cheer on Obama’s economic policies. Prepare for disappointment, Mr. Kudlow.
Larry Kudlow loves saying *King Dollar*.
The dollar will rise as it remains the reserve currency.
As more countries turn to direct conversion (rubles to yuan, etc) there will be less need for reserve banks to maintain as many dollars in their vaults. When they have to have more yuan or rubles or gold for their direct transactions, they will sell dollars to buy them. That will increase the “availability” of dollars on the market, dropping the strength.
So, as long as everything stays exactly the same as it is today, and as it has been since 1944 this story is accurate.
The question is what are the odds that things will stay the same over the next few years?
Bull Sperm.... inseminating the uninformed..
The question is who is buying how much of the currencies that are falling.
JMHo
“A strong dollar is a sign of a strong America”
Relying so much on a strong dollar is a sign of a stupid America.
Things haven’t been the same since 1944. You forget about Nixon closing the gold window.
Ping me at $1.00 = €1.00 then the dollar will be king!
Way to cheer on Obama’s economic policies. Prepare for disappointment, Mr. Kudlow.
..
Obama has nothing to do with the rising dollar. That’s all about rising US oil production, the end of QE, europe and japan devaluing their currencies and instability everywhere else. (well that instability is caused by obama so he can get some credit.)
As more countries turn to direct conversion (rubles to yuan, etc) there will be less need for reserve banks to maintain as many dollars in their vaults. When they have to have more yuan or rubles or gold for their direct transactions, they will sell dollars to buy them. That will increase the “availability” of dollars on the market, dropping the strength.
..................
This is definitely in the cards. The countervailing force is that the dollar is at the beginning of a long term secular rise. Any central banker worth anything knows this. So its not altogether wise to get rid of an appreciating asset—which the dollar as a reserve currency is becoming..
TROLL ALERT!!!
House of Burgesses
Since Sep 12, 2014
Things haven’t been the same since 1944.
,,,,,,,,,,,,,,,,,,,,
Make that read 1974,
There are pros and cons to everything.
The debts at all levels of government are the elephant in the room along with balance of payments deficits (trade imbalances). It’s all borrowed, and borrowing is stupid. The dollar is internationally unnaturally high with respect to the lack of manufacturing (American-”based” manufacturing on foreign soil not included). That’s conservatism. The debt regime’s anti-Americanism and artificial scarcities (supported by bipartisan animal worship and environmentalism) are as low as it gets. Call it communism, fascism or empire. It’s all the same centralized tyranny, and we see that it is shrieking during its weakening stage.
Possible explanations:
* Foreign investors are buying low (low priced assets today, like stocks in manufacturers and commodity producers) with the expectation it will rise in value in a few years. Whether due to a resurgence after Obama is out or sky high inflation is a different question.
* Our proven oil and gas reserves keep growing. If we finally drill on the East and West coast and Alaska for oil and all the natural gas formations around the world, the US will become a major petroleum exporter. Buying American could be an investment in the skyrocketing value of those energy companies once allowed to produce and export.
* While our economy is lousy, our odds of expropriating a foreigner’s holdings may be seen as lower than if the person’s money stayed in their own country. Thus we are simply the least bad investment option.
Yep. It's hard to kill the belief that somewhere, sometime, adults will be in charge again. People around the world still tend to believe that will be in the USA.
I was speaking ONLY of the reserve currency status.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.