"The question is not whether the dollar will weaken over time, but how it will weaken…"
That’s what the CEO of bond giant PIMCO, Mohamed El-Erian, had to say as central bankers from around the world gather in Jackson Hole, Wyoming. They’ll review the various strategies implemented to stave off the global financial crisis and discuss what they’ll do as the world economy recovers.
In Ben Bernanke’s case, we probably already know what he will, or won’t, do.
A student of the Great Depression, Bernanke understands how damaging a deflationary spiral can be. Spending slows, unemployment rises, businesses fail. And like a negative feedback loop, failing business leads to even higher unemployment and less spending.
Quite simply, Bernanke believes that, between inflation and deflation, inflation is easier to fight. So we should all expect Bernanke to allow, even invite, inflation to help rescue the U.S. economy.
*****Make no mistake, deflation is still a threat. So long as unemployment is on the rise, spending and prices will likely decline. And today’s surprise jump in new unemployment claims should serve notice that, despite recent improvements in some unemployment numbers, the trend for unemployment numbers is still up.
The housing market has shown some improvement recently. But what will happen when the summer home-buying season ends? Inventories will rise, and any individual homeowners wanting to sell will be competing against fire sale foreclosure properties. Who’s going to buy it seems likely that prices will be lower next spring? It’s the sickening reverse of what we saw earlier this decade where people bid up home prices because they knew they needed to buy now before prices go higher. If they now believe prices will be lower in the future and they’re not under some pressure to move, then they’ll wait. And this will further drive down housing prices and will definitely continue to affect new home construction which will affect employment (negatively), and, well, you get the cycle.
*****It’s widely believed that a weaker U.S. dollar will ultimately be good for the U.S. economy. That’s because a weaker dollar makes U.S. exports more competitive. And the logic goes that more competitive exports could spark a revitalization of American manufacturing sector and put people back to work.
Of course, any such manufacturing renaissance will be funded by the deterioration of our wealth. In essence, the weak dollar will be a silent tax, a massive redistribution of wealth from the middle and upper class to the manufacturing sector.
What’s more, the decline in purchasing power of the dollar is virtually unnoticeable. Unless of course, you travel overseas. The euro, currently fetching $1.42, could trade for $1.60 before the end of the year. It was as low as $0.90 earlier this decade.
No one will argue that a stronger manufacturing sector will be ultimately good for America. But it comes at a cost. The global playing field will level. And that means your investments will be the key to staying ahead of the game.
*****So whether you choose to subscribe to one of my advisory services and discover how we’re beating the market and inflation investing in commodities or small cap stocks, or you prefer to stay with a trusted advisor or manage your own accounts, it is absolutely critical for your financial well-being that you remain diligent and keep the prevailing economic trends in mind when investing. While you can sometimes go against a trend and occasionally make a quick buck, the typical individual investor needs to follow the trends for long term portfolio profitability.
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