For years now, I’ve argued at investment conferences with dollar bears who insisted that the greenback had nowhere to go but down.
They generally pointed to three primary reasons:
The U.S. trade deficit
Our sovereign debt
The demise of the dollar as the world’s reserve currency.
Of course, you can talk until you’re red in the face, but facts and opinions don’t settle arguments like these.
Markets do.
So take a look at this chart:
Since bottoming in May 2014, the U.S. dollar is up 17.8% against a basket of world currencies.
The dollar bears weren’t just mistaken. They have been on the wrong side of a historic upturn in the currency, racking up massive losses for themselves and their followers.
Their pain and suffering is far from over, in my view. A dispassionate look at the facts demonstrates that we are in a new era of dollar dominance.
Let’s consider why the dollar bears have been so wrong, starting with the federal debt, a subject I’ve written about at length here before.
The national debt is inexcusable and poses a genuine risk to future growth. But it doesn’t pose an existential threat.
At least… not yet.
Debt – be it consumer, corporate or sovereign – becomes a serious problem only when the debtor can no longer service it.
That is not a threat today. Annual interest on the debt accounts for just 6.5% of all federal spending.
True, it will become a much larger percentage in the future. But with stronger economic growth, spending cuts, tax simplification and entitlement reform, there is still time to achieve fiscal sanity.
Meanwhile, don’t kid yourself that other Western democracies aren’t grappling with the same problem. No major industrialized country is balancing its budget or running a surplus.
Now let’s turn to the U.S. trade deficit. It totaled $405.2 billion in the first nine months of this year – and is on track to exceed the 2016 level.
This is not cause for alarm.
Unlike a household deficit, a trade deficit isn’t a debt that must be repaid.
And a trade deficit equals a capital surplus. When we buy steel, cars, jewelry and electronics from foreigners, those sellers get dollars in return. Many of them are put in dollar-denominated assets like U.S. stocks, bonds and real estate.
Much of this foreign capital goes to finance mortgages and consumer loans, helping to raise our standard of living.
When a country runs a trade deficit, it means the purchasing power of the currency is strong, and consumers are wealthy enough – and optimistic enough – to spend.
As the past week’s Black Friday and Cyber Monday sales numbers attest, Americans are opening their wallets. That’s positive for the dollar.
As for the greenback losing its status as the world’s reserve currency… that has always been a ridiculous fantasy.
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The U.S. economy produces almost a quarter of the world’s annual wealth. Our country is the primary defender of the free world – and plays an extraordinary role in world leadership.
No other country attracts more students, more immigrants and more direct foreign investment.
What is the alternative to the dollar as …read more
Source:: Investment You
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