Terence R. Wilken
There is a new sheriff in town, and the rules have changed. The policies of Clinton and Rubin are no longer in vogue. The dollar must go down. It is now time for America’s companies to be the providers for the World. We must stop the massive purchases of products from the foreign markets. Mr. Greenspan has spoken, and we all know that when Alan speaks, the markets listen. He has reduced rates again, and his Fed has told us that he is prepared to take interest rates to 0% if necessary in order to get the economy moving. Remember that when a country reduces interest rates, it makes its currency weaker. You raise rates to make your currency stronger. For proof of this, just check out the strength of South Africa’s currency, the Rand. South Aftica’s version of the “Fed” has raised their interest rates to over 10%, and the Rand has increased in value by over fifty percent. The result has not been good for their economy, but then they do have a strong currency. Being king of the hill certainly makes you feel good.
Remember that I told you that the Chinese have pegged their currency to ours in order to be in a good position to continue to sell to us no matter what we did to stifle the trade deficit. Most of the rest of the currencies trade free, and rise and fall is based on the strength or weakness of the local economy. We are currently doing everything in our power to get the Chinese to revalue their currency, and the way we want it to go is UP. We must get them to play fair.
The only problem with trying to devalue our currency is that it has created a new environment for all currencies. As you can imagine, the foreign economies do not want to have the dollar get weaker. That would make their goods more expensive to the American consumer. Their Companies sales would be reduced. The battle lines have been drawn. We will not have a War to see which Country can have the cheapest interest rates. Before you know it, the Fed will be paying us to borrow money. The Japanese have even taken to purchasing the dollar to keep it strong. There is one twist to all this. The longer term rates have been rising as the short term rates have been reduced. They have been running counter to each other, and will probably continue to be contrarian.
What does all of this bode for the equities markets? This all depends on who wins the currency race. If the American economy is successful in devaluing the dollar, the foreign markets will not pursue the dollar as the currency of choice. The money that we provide them will not buy as much, and they will exchange it for another currency. They want to exchange the dollar for their own currency so that they can purchase material and labor in their local economy. This makes their currency stronger. These transactions make their goods more expensive to the American consumer. Less is bought. They now do not have the dollar to invest in the American economy. This does not bode well for the markets or the bonds that are needed to fund a growing economy. What is a Fed to do?
Remember when it used to take one income to provide housing and food for a family? This no longer applies. It is now required that both parents work in order to have a comfortable lifestyle. Will we ever return to the good old days? It is doubtful.
Read more by Terence R. Wilken at RWWNL.
Read the Federal Reserve’s Weak Dollar, Strong Dollar pamplet in (pdf).
