Is the drop in the dollar really a bad thing?
I've been bearish on the U.S. dollar for a long time now. However, I'm not one of those ferocious grizzly bears who believes that the dollar is about to implode and we're headed for hyperinflation. I'm more of a cuddly Koala bear who believes that we are headed for a relatively orderly, steady decline in the value of the dollar.
Everyone automatically assumes that a drop in the value of the U.S. dollar is a bad thing. And certainly a complete implosion of the USD like the grizzlies are looking for would be, however the more I think about it the more I believe the gradual decline in the value of the dollar that Koalas like myself are looking for wouldn't necessarily be a bad thing.
China's weak currency has enabled it to turn itself into a global power that produces a massive amount of goods for the rest of the world. A change in the value of the Yuan relative to the value of the U.S. dollar would help correct some of the trade imbalance that has built up over the years. The problem with the U.S. economy is that is has become too focused on consumption and services and not enough on making things that people, particularly those in foreign countries want to buy.
I know that having a strong currency appeals to a sense of national pride that people have. "Grrrrrr, we're powerful and everyone has to use our currency." Well I have news for you, after years of mismanaging our economy the rest of the world is catching up. One of the ways that balance can be restored to the system is for our currency to drop in value, making the things that we produce in America cheaper for foreigners to buy and more competitive for us to purchase.
I see lots of people here on CAPS who don't understand how the world works. They are uber-bears on the U.S. dollar, yet they have a portfolio that's full of red thumbs. Ahhhh guys, stocks will not drop, particularly stocks related to natural resources, if the dollar continues to fall. Did you ever notice that the market goes up every time the dollar drops? You might want to refine your CAPS portfolio a little.
Not only would a weaker dollar be good for trade, and in turn eventually the economy, but it would be good for the environment as well. As someone who works in the auto sector, I'm hardly what one would consider a "tree-hugger." I'm not even sure that global warming exists. I'm on the fence on the issue. Of more importance to me is that we stop shipping our hard-earned money over to the Middle East for their oil. Doing so is a good idea as a matter of national security alone. We shouldn't be giving tons of money to countries like Iran (OPEC's second largest producer).
More importantly though, more expensive oil and in turn gasoline would force the U.S. to focus on developing domestic sources of power. We would be better off using our own resources like electricity generated from natural gas and coal to power plug-in electric vehicles than using conventional gasoline that's made from oil shipped from overseas.
I won't even get into how a drop in the value of the dollar would help out with that whole massive national dept thing and the collapse in asset values that we have experienced.
Wow, that was quite a rant before I got to the point of this post. I originally started writing it because I came across an interesting rumor this morning. A UK paper called The Independent published a story today called The demise of the dollar.
The piece contends that a number of countries in the Middle East have ben having secret discussions with China, Russia, Japan and France to switch from pricing oil in U.S. dollars to a basket of currencies including gold, the Euro, the Chinese Yuan, and a new planned unified currency for the Gulf nations.
On a related note that should be subtitled "How Soon We Forget" I' am currently reading an excellent non-fiction book on World War II called 1942 by Winstron Groom of Forest Gump fame. The U.S. lost thousands of lives and spent zillions of dollars fighting a huge war to free China and France from Japan and Germany respectively during WWII, yet here they are barely a generation later working against us. As someone who values loyalty above most other personality traits, this bothers me to no end. They should be kissing our feet, not having secret meetings about how to stop using our currency.
I digress. The Independent clains to have confirmed this rumor with "Gulf Arab and Chinese banking sources in Hong Kong." It also claims that U.S. authorities are aware that this meeting occured. Now I don't know whether this is true or not, but the move makes a lot of sense from the perspective of these countries. If I was them (and I didn't owe the U.S. one) I'd be doing the same thing.
As someone who believes that at least the United States, if not the rest of the world will experience subpar economic growth for a number of years to come, it's difficult to be bullish on oil unless the value of the dollar continues to fall. I have kept a decent position in a foreign, dividend-paying E&P in my personal portfolio as a hedge against dollar weakness. I have always preferred oil to gold because it actually generates cash flow rather than just sitting there and actually costing money to store.
Again, I don't know if the rumor is true, but it makes a lot of sense and the article is an interesting read.