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August 5, 2010
Lack of International Confidence in Obama's America
While the vast majority of Americans go about their daily business, few pay much attention to the value of the U.S. Dollar as compared to other currencies as an indicator of the confidence the rest of the industrialized countries have in the United States.
It is not only the relationship of the various currencies to each other but the rapidity of any increase or decline that reveals the true attitude of the world investor class.
In the past three months the almighty dollar has shown the following trend against these three major currencies: (http://www.x-rates.com/)
Japanese Yen Since May 5 Decline of 9.8%
British Pound Since May 20 Decline of 10.6%
Euro Since June 8 Decline of 10.4%
The dramatic rise in the value of the Euro (considering that only a few short months ago the future of the Euro was nearly written off as Greece, Portugal, Italy and Spain suffered through a major debt crisis) is indicative not only of the opinion of the U.S. economy but the initial steps taken to reduce debt and cut back government spending within these same countries as well some embryonic but positive signs of economic growth in the rest of the world.
The exceptionally high rate of decline in currency value over such a short period is a major bellwether that confidence in the economic future of the United States has begun to fall off a cliff as the fiscal policy of not only the Government in Washington D.C. but that of the Federal Reserve has come under great scrutiny and skepticism.
There are those that contend a lower dollar is good for exports and in a growing economy that perhaps may have some validity; however in the current domestic U.S. business environment with the myriad of new taxes and regulations on the horizon, there is and will not be a growing economy to create jobs and attract investment capital particularly from overseas. The higher value of the dollar will, in that environment, only serve to make imports to the country upon which the economy depends (such as commodities) more expensive.
The prospects for the United States to enter into another recession are increasing by the day. The rest of the world is becoming more convinced of it as well. As long as the Obama administration continues its current policies of tax, spend and regulate there will not be a recovery and this country's citizens will be in the position of watching the rest of the world experience growth and capital investment.
Update: Greg P. Richards offers a cautionary note:
In terms of economic substance I think this is an outlying opinion. Not outrageous, but an outlier. I follow the economy pretty closely and I would make the following points:
1. Double dip recessions are very rare, and particularly so given the huge amount of liquidity the Fed continues to supply to the economy. What seems far more likely is that we have shifted to what Mohammed El-Arian calls "the new normal" meaning that our baseline growth rate is probably something in the range of 1 percentage point below historical levels - i.e., maybe in the range of 2.3% rather than the historic baseline of 3.3%. This means that unemployment will remain high, BUT that the economy will be growing.
2. Take a look at the carloadings of Burlington Northern, one of the two major western railroads and thus one that is carrying Asian goods from California to the Midwest, among other things:
As you can see, Burlington Northern weekly carloading are at a recovery high. Other transportation indicators show the same trend.
3. Economic analysis is very iffy, so I cannot say that his analysis of the dollar is wrong. But the dollar is notoriously volatile. The trend he is looking at is this:
This is a daily basis scale. And the slide is indeed noteworthy. But if we expand the time scale to the last decade, we get this:
It is certainly the case that wise men expect the long term future of the dollar to be negative because of the debasing of currencies by all governments. But this is generally said in relation to gold rather than in relation to other currencies because, amazingly as it may seem, with all out faults, we are still doing better in the debt-to-GDP sweepstakes than a lot of foreign countries.
So while I agree with the general sense of the piece that Obama is destroying sound economy in the U.S. I don't agree with the prediction (a) of a new recession or (b) that the current decline of the dollar is necessarily an indication of that destruction.