Today, Bloomberg published a news item titled, "Dollar Bear Market Slide More Boon than Bane for Bush."
We are witnessing the downward spiral in our dollar that we and our sister publication Financial Intelligence Report have long predicted.
The dollar recently smashed though its key support level of 1.3700 to the euro. As we write it is at 1.3817. That is a whopping 40+ percent drop since October 2000.
In short, the dollar is, we feel, in a very dangerous and damaging downward spiral.
[Editor's Note:4 Foreign Currency Plays to Beat the Falling Dollar. ]
CNBC has had a number of commentators talking about this issue, today. Many of them appear to agree with the Bloomberg title. So far, all of the commentators and questioners have concentrated exclusively upon the financial and economic aspects.
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Not only do we believe that most commentators have got the economic issues wrong, but they have ignored the most vital issue — politics. But, we'll talk more about that later.
To be fair, it is little wonder that Wall Street and its related media are focused on the economic reasons. They are encouraged to do so from the top — by our government.
Last night, Larry Kudlow, of CNBC, had Henry Paulson as a prime guest.
Paulson said, "A strong dollar is in our nation's interest and our currency rates, like all currency values, should be set in a competitive market place, based upon economic fundamentals." We heartily agree with that statement.
Paulson then went on to describe how well positioned our American economy was and how basically healthy it was, as it transitioned from an unsustainable rate of growth to a lower one that was possible into the future.
However, there are problems with that statement.
First, our plummeting dollar appears to indicate that the vast bulk of governments, corporations, and rich individuals disagree, and are fast selling out on the dollar. Mr. Paulson appears to be almost alone, outside America, in saying our economy is fine.
The second problem is that our government is doing precisely nothing to defend our dollar. It has not set an interest rate that is more internationally competitive (and we believe realistic, reflecting the true rate of inflation).
We must admit, as Mr. Paulson was speaking, we were tempted to think of a statement by the late Sir Winston Churchill, which went, "He has to conceal what he would like to make public and to make public what he would most wish to conceal."
Another extraordinary statement contained in the Bloomberg article was that the chief U.S. economist at Goldman Sachs apparently said, "A weak dollar is in the interest of the United States."
Now, that is absolutely fascinating.
As our readers will know, Goldman is an outstandingly successful investment bank. But, we'd also point out that our Treasury Secretary Henry Paulson is a former Goldman chief!
From that, we assume the current management of Goldman is very close to our national Treasury.
How come then, that we get two such clear and directly contrary statements from a former and then a current Goldman man?
The answer is, of course, politics!
But most of the media are concentrated on economics. What does it mean? Well, let's examine the issue.
The main argument of those who believe a weak dollar is good for America, is that a weak dollar makes U.S. exports cheap and cuts our balance of payments deficit. In the short-term that is correct, and many American corporations with a large percentage of overseas sales have reported stellar earnings, mostly deriving from overseas exports. On the surface this looks good for America.
[Editor's Note:Buffett: The best book ever written on investing.]
However, those familiar with the experience of countries such as Great Britain, will have heard of the ‘J' curve. Apparently, judging by the comments made by CNBC guests today, very few people in the U.S. have heard of the ‘J' curve.
Briefly, the ‘J' curve means that, with currency devaluation, a balance of payments deficit falls in the short term. In the long term, however, it leads both to an increased trade deficit and to imported inflation.
One guest, Meg Brown of the normally conservative Brown Brothers Harriman was even tempted, in her enthusiasm for a weak dollar, to say that because the CPI was low there was no evidence to show that dollar weakness was inflationary! Ever heard of leads and lags?
There was at least one sophisticated guest who began to hit on the real reason for our government "playing" with the fire of a weak dollar.
In our opinion, he correctly pointed out that our American economy depends vitally upon growth and an inflow of overseas money to fund our massive current account deficit. And there's the rub.
Until 1991, every American government took great care to intervene, often massively, to ensure a strong currency. Two key results were long periods (until the Nixon's 1970s inflation, uncorrected until Reagan's vital political support for Volcker in the late 1980s) of low inflationary growth.
It also enabled our dollar to supersede the British pound as the world's reserve currency. This gave America great political, economic, and financial power. For instance, our Fed basically determined the world's interest rates, and oil was paid for exclusively in U.S. dollars. That financial power translated into important political power.
[Editor's Note:12 Ways to Recession Proof Your Portfolio]
Only a politically blind man would deny that our intervention in Iraq has cost us many important friends and political power. However, the erosion of our political power through a weak currency is harder to see. Indeed, many Wall Street commentators still ignore it.
Since 1991, our government has allowed our dollar to fall, but to do so with a deafening silence as far as official currency support was concerned. The result was a fall in our dollar.
Then, as currency dealers saw the U. S. Treasury talk of a strong dollar was precisely that, with no action. Then our dollar renewed its downward spiral.
We believe that for political reasons, with an upcoming election, neither our government nor the top echelons of Wall Street dare to tell us the truth. Indeed, as we have said before and now paraphrase from Winston Churchill, the truth is so valuable that it must be protected by a bodyguard of lies.
It may just be that, in the short-term (until after the election) that a weak dollar could, at a last ditch stretch, be good for America.
However, in the medium to long-term, it is a mammoth economic lie that a weak dollar is good for America.
Our readers should beware. The more senior and established the commentator, the bigger the lies.
Editor's note:
4 Foreign Currency Plays to Beat the Falling Dollar.
12 Ways to Recession Proof Your Portfolio
Buffett: The best book ever written on investing.
