Resurrection of Dollar Signals Sustained US Recovery
Published in La Tribune
(France) on 15 July 2013
by Michel Santi (link to original)
(France) on 15 July 2013
by Michel Santi (link to original)
Translated from
by Greg Childers.
Edited by Molly Rusk.
The dollar has been soaring since the Fed announced that it would continue its policy of printing money until unemployment drops below 6.5 percent. According to economist Michel Santi, this trend should continue, presaging a resounding U.S. comeback in world markets.
Though relatively stable over the last few months, the dollar underwent a continuous depreciation against nearly all other currencies these last 10 years, a debasement caused by American deficits inevitably weighing on its value. The outrageous expenses under the Bush presidency, combined with his various military expeditions and crowned by the housing collapse, effectively convinced investors to avoid U.S. assets.
The preceding period, however, was marked by a strong rise of the greenback under the impetus of a Clinton administration that reaped dividends from high taxes and the geopolitical stability that followed the dismantling of the Soviet Union. As a result, budget surpluses, combined with real and positive U.S. interest rates, promoted the dollar and market assets — notably American — as investment choices.
The End of Quantitative Rate Reductions Signals Return of the Dollar
Today, thanks to withdrawals from Iraq and Afghanistan and to spectacular progress in the battle against deficits (budget and trade), the context seems strangely similar to that of the 1990s. The economic recovery of the world's superpower, along with substantial budgetary savings, will indeed bring the U.S. deficit back to around 3 percent of gross domestic product in 2013. Now, the decisive factor that must be put in place for the recovery of the dollar will be the final announcement of quantitative rate cuts by the Federal Reserve, an unavoidable measure needed to improve employment figures.
Let's not forget that its chairman, Ben Bernanke, has courageously announced a continuation of money printing if unemployment does not drop below 6.5 percent — a level that will soon be reached. Finally, the expected continuation of the yen's decline — due to Japan's plan to double the money supply within two years — will be the determining factor that will permit a surge in a real and hard greenback along with all American assets.
The Party Is over for Raw Materials and Precious Metals
The dollar's strong trend toward a general appreciation will mean the end of the party for raw materials, "commodities" and precious metals. The age when emerging markets, led by China, would exhaust all available resources is now well and truly over. Their consumption has returned to less breathtaking levels, as their engines are starting to run at more reasonable rates.
In any event, the process of revaluation, or rather devaluation, of these assets is only in its infancy. The process will not affect overall growth but instead will simply reflect a correction of past excesses. As for the issue of inflation, many times brought up by relentless critics of printing money, it no longer worries us today as it does the fans of conspiracy theories. After all, the facts are indisputable: American unemployment, still very high, is gradually decreasing and the private sector — both families and U.S. companies — have largely settled their debts (deleveraging). Under these conditions, the fall for precious metals and other commodities will be all the harder.
Strengthening of the Dollar: An Advantage for the United States
The big winners will be American assets, especially since the correlation between the dollar and stock market performance is very different than that seen with Japan's yen. Indeed, much less dependent on exports, the U.S. gains an indisputable advantage from the strengthening of its currency.
Need I remind you that American business profits had grown sharply in the 1990s along with the dollar, before experiencing a drop identical to the greenback's during the next decade? In addition, as emerging markets are much less dependent on U.S. currency today than 10 years ago, a surge in the dollar will have practically no impact on their growth. Thus, we can expect an in-depth rebalancing of assets, which should favor U.S. currency and stock exchanges in a decisive manner.
Though relatively stable over the last few months, the dollar underwent a continuous depreciation against nearly all other currencies these last 10 years, a debasement caused by American deficits inevitably weighing on its value. The outrageous expenses under the Bush presidency, combined with his various military expeditions and crowned by the housing collapse, effectively convinced investors to avoid U.S. assets.
The preceding period, however, was marked by a strong rise of the greenback under the impetus of a Clinton administration that reaped dividends from high taxes and the geopolitical stability that followed the dismantling of the Soviet Union. As a result, budget surpluses, combined with real and positive U.S. interest rates, promoted the dollar and market assets — notably American — as investment choices.
The End of Quantitative Rate Reductions Signals Return of the Dollar
Today, thanks to withdrawals from Iraq and Afghanistan and to spectacular progress in the battle against deficits (budget and trade), the context seems strangely similar to that of the 1990s. The economic recovery of the world's superpower, along with substantial budgetary savings, will indeed bring the U.S. deficit back to around 3 percent of gross domestic product in 2013. Now, the decisive factor that must be put in place for the recovery of the dollar will be the final announcement of quantitative rate cuts by the Federal Reserve, an unavoidable measure needed to improve employment figures.
Let's not forget that its chairman, Ben Bernanke, has courageously announced a continuation of money printing if unemployment does not drop below 6.5 percent — a level that will soon be reached. Finally, the expected continuation of the yen's decline — due to Japan's plan to double the money supply within two years — will be the determining factor that will permit a surge in a real and hard greenback along with all American assets.
The Party Is over for Raw Materials and Precious Metals
The dollar's strong trend toward a general appreciation will mean the end of the party for raw materials, "commodities" and precious metals. The age when emerging markets, led by China, would exhaust all available resources is now well and truly over. Their consumption has returned to less breathtaking levels, as their engines are starting to run at more reasonable rates.
In any event, the process of revaluation, or rather devaluation, of these assets is only in its infancy. The process will not affect overall growth but instead will simply reflect a correction of past excesses. As for the issue of inflation, many times brought up by relentless critics of printing money, it no longer worries us today as it does the fans of conspiracy theories. After all, the facts are indisputable: American unemployment, still very high, is gradually decreasing and the private sector — both families and U.S. companies — have largely settled their debts (deleveraging). Under these conditions, the fall for precious metals and other commodities will be all the harder.
Strengthening of the Dollar: An Advantage for the United States
The big winners will be American assets, especially since the correlation between the dollar and stock market performance is very different than that seen with Japan's yen. Indeed, much less dependent on exports, the U.S. gains an indisputable advantage from the strengthening of its currency.
Need I remind you that American business profits had grown sharply in the 1990s along with the dollar, before experiencing a drop identical to the greenback's during the next decade? In addition, as emerging markets are much less dependent on U.S. currency today than 10 years ago, a surge in the dollar will have practically no impact on their growth. Thus, we can expect an in-depth rebalancing of assets, which should favor U.S. currency and stock exchanges in a decisive manner.