The Long Term Direction of the USD Will Affect Your Net Worth – Here’s How

Friedrich Global Research points out that Instead of worrying about whether it’s good to have a strong dollar or a weak dollar policy investors should be trying to deal with the reality of the situation and attempting to figure out the long term direction of the dollar in order to come out ahead no matter what happens. This articles help you with that effort.

(This article has been edited and abridged by Lorimer Wilson, Managing Editor of munKNEE.com with the assistance of A.I. Bing for the sake of clarity and brevity to provide a fast and easy read.)

The Money Supply

The world runs on the theory of supply and demand and when there is too much supply and not enough demand the dollar falls until the printing presses stop or at least slow down.

The Stock Market

Because U.S. stock markets are heavily weighted with U.S. firms that operate as multi-nationals and do a lot of business overseas when the dollar falls the money that they make selling their products in foreign currencies is repatriated back into U.S. dollars at a much higher number than if the dollar were to stay static. Thus, when the dollar is weak these companies report much higher earnings and they look more attractive from a growth rate point of view and when that happens across the board, markets go up.

The Bond Market

When interest rates are at low levels, anyone buying long term bonds is setting themselves up for destruction of their principal investment because, when interest rates go up, new bonds are issued at higher rates and the demand goes to those new bonds and out of the older lower interest rate bonds and, as people sell the old ones to buy the new ones, the principal on the old ones drop. With every point rise in the interest rates, more and more of one’s principal is destroyed and it eventually gets to the point where bond investors are forced to hold their bonds to maturity, as that is the only way they are able to get their full principal back. In addition, the weaker dollar eats away at the value of the bonds in dollar terms.

The Real Estate Market

Real estate is not a place to invest when interest rates begin to rise as people will find it harder to get loans. In addition, municipalities will need to increase property taxes to make up for the shortfall in revenues and this will make the cost of ownership much higher.

The Money Market

Being in cash in an inflation/interest rate rising environment is also bad as inflation eats away any interest rate gains made and then the buying power of that cash goes down as the U.S. dollar goes down making one’s dollars worth less going forward resulting in negative growth in one’s real net worth.

Conclusion

The only place to be is in the stock market, because if the markets go up 10% and the dollar goes down 5% you are still ahead of the game. You are combating the weakness in the dollar by increasing the number of dollars you have at a much higher rate than the dollar is devaluing.