The Plummeting Dollar Prosperity Plan
It is becoming painfully obvious that the Fed, Treasury, and Administration's disastrous recovery plan hinges on the devaluation of the U.S. dollar. Their specious strategy stems from the belief that a falling currency can re-ignite exports and spark a recovery in manufacturing while putting a floor in U.S. asset prices. But just as the president's initials indicate, the plan stinks of B.O.
Firstly, a falling currency does nothing to expand a country's exports or domestic production. Let's say for example, country "A" has a dollar that is trading in parity with that of country "B." Let us then assume that country A departs on a currency printing policy that mimics that of the United States. Let's also say that because of the increased supply of newly minted dollars, the value of country A's currency is eventually cut in half. Then, just one unit of country B's currency can be exchanged for two of A's dollars. The mistaken belief held by those who espouse a weak currency is that now country B can buy two dollars worth of goods with just one unit of their currency -- thus expanding the foreign demand for A's goods and ushering in a manufacturing boom.
However, what they neglect to understand is that the inflationary policy of A has not left the dollar price of the country's goods static. In fact, the value of goods and services provided by A should have doubled as the purchasing power of the currency was halved. The result being that country B is immune from A's inflation and can purchase the same amount of goods with just the same amount of money.
The resulting problem is that not only has A done nothing to stimulate domestic production, it has discouraged foreign investment while destroying the purchasing power of the dollar, sending prices for both domestic and foreign purchases out of reach for the average consumer. The resulting inflation eventually discourages domestic manufacturing because the purchasing power of the country's middle class and poor is wiped out. The result of skyrocketing prices is that discretionary purchases are eliminated, causing massive job loss and plummeting GDP output.
History clearly shows any such currency devaluation strategy to be a complete failure. In 2005 China announced it would increase the value of its currency and abandon its decade-old fixed exchange rate to the U.S. dollar in favor of a link to a basket of world currencies. Since then the Yuan has rallied from .1208 USD to .1467 USD. But the falling dollar has had a negligible effect on U.S. exports. For all of 2005 the U.S. deficit with China was $201.5 billion. In 2008, three years into the dollar devaluation, it soared to $266.3 billion. And despite the worst economy since the great depression -- which caused U.S. imports to decline sharply -- the annualized rate for 2009 is still $201.2 billion.
If all a country needed to do to achieve manufacturing supremacy and economic dominance was devalue their currency then Georgia and Bosnia would be considered paragons of economic prosperity. That's because a country's economic health, productive output and balance of payments has less to do with the value of the currency and more to do with tax rates, union influence and environmental legislation.
As long as we continue to substitute spurious growth models for genuine growth policies we will continue to lose global power and influence. The only part of the current plan that is sure to work is the cessation of falling asset prices. Unfortunately for us, that will come at the risk of creating intractable inflation and putting our foreign creditors on notice that we will destroy not only the value of their U.S. dollar holdings but the very value of the currency in which they are denominated. Who does Mr. Geithner think he's kidding? The Chinese have already moved to purchase short dated Treasuries so as to allow them an easy escape. They may also dramatically curtail their purchases. For a country that needs to issue nearly $3.25 trillion dollars of debt this year alone and trillions of dollars for many years to come, that is disastrous for this debt-laden economy.
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Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com
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Inflation is like an intoxicating beverage, we love it when our assets rise, yet hate it when the products we consume for existence do. This to shall pass and then we will be enjoying deflation in assets,(homes, stocks) and inflation of consumeable goods. Whee! This is going to be fun!
Let me guess, Michael...
While I agree that printing money causes inflation, I don't know how anyone could argue that dollar debasement doesn't promote foreign investment and a more beneficial balance of payments.
The way this works is: when country B's money is worth twice as much as country's USA's money, investor's from country B exchange their currency in USA's currency, fly to USA, and buy USA's assets.
If you're Bosnia and don't have any assets, yes, it doesn't work.
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No. When a country has a chronically falling currency, it tells all foreign creditors and investors to stay away. Why would any entity want to own assets in a falling currency.
There is no real reason for any country to accept any currency other than its own in foreign trade. Certainly the notion of a "world reserve currency" is obsolete..
The USA is still a mighty nation, but its leaders must stop listening to proven financial swindlers who claim to be businessmen and "too big to fail." Clue ya... they have ALREADY FAILED quite stupendously, and there is absolutely no reason in this world why 306 million American citizens (and billions of world citizens) should put up with this. "We won't. Fix it. Now."
Bush did this for 8 years in office and bankrupted the core economy.
Were we all supposed to just commit suicide then?
Where were you when Bush pushed massive tax cuts and off-book spending to fund two wars?
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I was screaming for eight years that he was destroying the country
What about open trade versus trade barriers.
Any untrue orthodoxy there?
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Want to profit from the decline in the US Dollar? Hedge your bet by investing in the currency of asset rich countries. Two you might consider are the Canadian Dollar and the Australian Dollar.
ETF's are available for both.
So the death of the American middle class is an inside job, and the last nail in the U.S.-manuf
Michael,
You make an interesting point.
"That's because a country's economic health, productive output and balance of payments has less to do with the value of the currency and more to do with tax rates, union influence and environmental legislatio
I take it that the improved productivity, that results from the infrastructure supported by higher personal tax rates, more union influence and more enviromental protection legislation results in more long term growth.
Perhaps you have a reference for this claim?
Regards,
Yea, look what Global influence in Iraq has done for our economy. Maybe we should quit worrying about Global influence and take care of our own infrastructure.
thank you for busting the theory of the devalued currency spurring exports belief ingrained into economics and business people since high school. i have been arguing for years that no country has ever devalued its currency on the way to prosperity in the history of the world only to met with the increasing exports through a devalued currency argument as if it was the theory of evolution, totally incontrivertible.
my concern is that these guys aren't as dim as they seem so they are purposely inviting the end the dollar and consequently the usa economy for soem unrevealed reason that fits into a larger model of what they want for a world economy. my guess is a sort of global equalization of labor and capital which would level the field for real competitive advantage trading instead of labor and capital arbitrage global trading.
in any case, the consumer model for the usa economy is dead and will be the death of the dollar and the usa economy if continued, especially if incentivized to continue.
My thoughts exactly! One World government, with the former nation known as the U.S. of A. just a cog in the OWG. Death of middle class is just one step.
USD was in a long slide down under Bush & Co. Remember when 1 USD = 1 Euro?
So, I wouldn't lay it on Pres. Obama. At this point, he has little choice but spend to try to fix the economy that has been wrecked over the past 8 years.
On currency valuation and international trade, Dr. Ravi Batra says that is precisely how China has enjoyed much of its success, keeping its currency artificially low rather than let it float on the open market.
http://www
Could it be that you are biased by your experience in the financial industry?
is china keeping the yuan low or is it defending against an artificially high valued dollar? the usa policy since reagan is the exportation of inflation through the current accounts deficit. if a country wants to defend itself against the policy the easiest way is to peg its currency to the dollar.
We've already reached the limit, for Obama has said we've run outta money. Deficit spending got us into this mess, so let's deficit spend some more---what a genius approach!
You're absolutely right that we're seeing intentional devaluation of the dollar. There is no other reasonable interpretation of events. I believe it's an attempt to inflate away a big chunk of govt and consumer debt. We're the greatest debtor nation in the world. Inflation penalizes creditors and rewards debtors, so Barack has decided to sacrifice our national creditworthiness for temporary debt relief. Unfortunately he still has no plausible plan for paying for all the expensive stuff he's promised, so the debts will keep piling up. We all used to think George W. Bush was pretty good at piling up debt and weakening the dollar, but he was an amateur compared to Barack.
Reagan is the one who made us have to worry about credit worthiness because he changed us from a creditor nation to a debtor nation.
I think there is a huge difference between investing in our infrastructure that can help us grow the economy as we see now and wasting resources things like unprovoked war (you just blow your money up with bombs).
You know what the solution will have to be to pay back the unproductive debts created by Bush. Revenue will have to be generated.
Conservatives of all people should know there is no such thing as a free lunch!
Economics is interesting because simple goals are sought with complex means.
The simple goal is to get things to people who want them.
Many people are quite willing to make these things.
For example, today many people want a new car and many people want to make cars, and yet neither group is fully satisfied.
Simple problem.
Economics also needs a unifying theory.
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Graham in Canada. Inflation is a fact of a growing, thriving economy. Government contrived inflation destroys the savings of the responsible citizens of a country while rewarding wanton spending and debt. of spendthrift citizens. Punishing responsible behavior and rewarding harmful, destructive behavior telegraphs the knowledge that self-interest, greed, selfishness are proper goals of citizenship. Selflessness, thrift, altruism, are dead-end behaviors only for the niave and gullible.
Such government described above is dangerous, incompetent administration.
Who will be hurt most by a devalued US dollar is those that have a large cash reserve (passbook savings), who buy imported goods and / or travel internationally.
If you took your cash and invested in real property for example, it is like the value of your investment would be rather stable.
So, if you have acted responsibly and used your savings to purchase your own home for example, you should be okay.
I do think too much has been done to preserve white collar jobs in the financial industry (rewarding irresponsibility) and too little has been done to preserve / create blue collar jobs that build things of real value in our society. We should see more going to preserve create blue collar jobs under the ARRA.
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