with benign inflation is the Goldilocks equation for consistent economic growth, then the US Fed has to find a method very quickly to wean Wall Street of this culture of low interest rate expectation. Firm interest rates with mild inflation is a net positive on the US economy resulting in jobs creation far more reaching than any Keynesian conceptualized government public works program. At the center of all this global activity is the US economy and the strength of its US Dollar. Without strong US demand for goods and services China cannot sustain its growth. Read here for today's BBC report and China's slowing economy http://www.bbc.com/news/business-30640116 and Europe cannot pick itself up from the onset of recession as weaker European nations suffocate under their debt burdens. read here BBC report for Eurozone crisis http://www.bbc.com/news/business-13366011A strong US dollar is what the market needs as that translates into cheaper commodities to get the world growing again.
One Hundred and Forty Nine dollar crude oil in tandem with an unbridled US credit bubble is what has sunk the global economy the last 6 years and finally it seems we have rid ourselves of the two calamities.
Six years of near zero interest rate Fed policy and a
jittery Wall Street has led us all to believe that the USA must continue this
status quo. But in the longer run, from a distant perspective, the question
begs of itself – why did the US economy stutter through a weak Dollar policy
and when exactly are traders on the Big Board going to realize that it is time
for us to wean ourselves off this cycle of low interest rates.
Witness the economic collapse of Japan in the 1980’s and 2
decades of low interest rate policy. If low interest rates did not shake the
largely export driven Japanese economy from its property an credit asset
bubble, then could it be reasoned that a weaker Japanese Yen had not
contributed to further Japanese economic expansion. Could it be true that
conversely, a stronger currency still equally promotes domestic economic growth
and increases manufacturing competitiveness in the race to service the domestic
sector and export surplus products to other nations?
God forbid the US economy should suffer a similar fate. In
the first place the US today is not a largely export driven economy and in the
second place its banking market infrastructure and credit markets are far more
liberalized to what the Japanese banking model provided in the 1980’s to deal
with the problem of credit bubbles. It is a credit to the US economy that
although the USA has pumped more money into short run deficit financing program
to provide government sponsored liquidity on a Keynesian basis to coax the
moribund economy back to life, in the long run the US government intervention
has worked to grease the credit market machinery to rid itself of excess bad
credit and shake down to provide a clearer basis for fresh lending. Although I
am not a supporter of government intervention in a free market and I do not
support the idea that the rescue of AIG or Detroit was largely beneficial, the
degree of government intervention through fed open market operations was
necessary to pump liquidity into the credit system and restore faith. However the flip side to government
intervention had to be lower interest rates and consequently a weak US Dollar.
And I for one whist accepting the short term US Dollar weakness was necessary
as part and parcel of the government effort to rid the system of shaky credit,
in the long run a weak US Dollar does not support the contention of a growing
US economy based upon domestic economic
strengths coupled with benign and temperate inflation.
Strong interest rates attract overseas investment into USA, increases economic integration with Europe and assists China to export low-tech manufactured goods to the USA.
A strong US Dollar means cheaper commodity prices, cheaper oil, cheaper costs of production and eventually assists in the reduction of budget and fiscal deficits that is currently strangling the USA. Compare the following charts demonstrating the CRB index commodities and the fall in prices and the rise of the USD the last 10 years courtesy Omega research.
10year chart CRB Index.
10 Year Chart USD
Of course in the short run Dollar strength can affect corporate earnings with those US companies exporting, particularly tech sector goods and volatilities make it harder to predict corporate earnings.
Please read here Bloomberg article on Dollar climb http://www.bloomberg.com/news/2014-12-20/dollar-resumes-climb-as-yellen-signals-2015-interest-rate-rise.html
But Overall a stronger US Dollar is good news as the US does not have to import inflation and the value of gold as a safe haven investment diminishes as the US Dollar rises to prominence with the march of the Greenback in 2015.
Overall a strong Dollar policy translates into cheaper oil and gasoline at the pump and thats exactly what is needed to bring some kind of economic sense into the pricing of the most widely used commodities for global manufacturing of goods.
Pieter Bergli - DeLoren Trust Holdings
Forex Market Education
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