Saturday , 15 June 2024

The U.S. Dollar; Interest Rates; Economic Growth; Inflation Rate – Things Are Going To Get Choppy (+2K Views)

…The latest ‘growth’ the U.S. has had is superficial – all thanks to a weaker dollar. Let me explain. . .

The original article has been edited here for length (…) and clarity ([ ])

Look at these three charts:

First – and most importantly – the U.S. dollar has been in a steep decline over the last 17 months – regardless of the recent rally.

Why does this matter?

When a country needs to boost economic growth – a key thing they can do is to weaken their currency. This matters because:

1. It will give the nation a trade advantage and make their exports look attractive abroad.

2. The weaker currency will make imports more expensive, discouraging domestic consumers from buying foreign goods and, since the USD has declined, exports have grown considerably.

As we saw above, U.S. exports have risen sharply since the currency has weakened. Let’s see how GDP has done since.

It’s been choppy – but the trend is upwards – so it looks like the weakening dollar has helped U.S. growth. Here’s the problem, though. You can’t just cheapen your currency to get never-ending growth. There’s no such thing as a free lunch…The weakening dollar is only temporarily helping GDP, however, and the longer it goes on for, the more prices will rise throughout the entire economy, negatively affecting it. This means that the export growth the U.S. has had – which translates into GDP – isn’t sustainable and as inflation starts trickling into the economy (because all prices don’t rise at the same pace) – the whole will be negatively affected. 

Putting this into context – in 2017 roughly 70% of U.S. GDP…[came] from consumption whereas -4% came from net-exports (this means we imported more than we exported by 4%)…The weaker currency:

  • dissuades imports
  • and promotes exports
  • thus increasing net-exports
  • but, with 70% of the U.S. growth driven by consumption, the ongoing inflation will eventually damage the economy
  • [and, given that]…the Fed has tied themselves to the 2% inflation’ target…the market will expect them to start aggressively hiking rates once inflation hits 2% – which will most likely send the economy into a recession.

…The economy is much weaker …[than] the mainstream likes to admit – from subprime auto loan delinquencies soaring, to declining foreign demand of U.S. debt and that’s why I believe the U.S. can’t sustain higher rates. The economy is still very fragile and heading towards an ugly period – known as stagflation – and this is when the economy has constantly increasing inflation and low growth – teetering in and out of recessions.

The last time we saw stagflation was during the 1970’s which was known as the ‘lost decade’. The only way the U.S. was able to escape without imploding was thanks to Henry Kissinger setting up the ‘petro-dollar’ with the Saudis and Federal Reserve Chairman Paul Volcker hiking rates all the way up to about 20%. Imagine today if interest on the record amount of government, auto, college, mortgage, and credit card debt all shot up to 15-20%. The Government could never allow that to happen.

This is a dangerous place to be in for the Fed – they’re stuck between a rock and a hard place. Either they decide to:

  • fight inflation and raise rates faster – which will send the economy spiraling into a debt-ridden collapse
  • or ditch their inflation target and let prices rise – in [and] attempt to get more economic growth

[yet]…all the Fed…[has] done is play hot-potato…hoping they can keep things going until they don’t have a choice but to do something drastic…

If the dollar keeps rising – which I don’t believe it will, or can – U.S. exports will fall and imports will rise, negatively affecting GDP and the trade deficit. Things are going to get choppy.

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