3 Reasons the Dollar Will Fall with Trump’s Fiscal Stimulus

Analysts are locating the cause for the recent rise in the dollar on investors now pricing in President-Elect Trump’s fiscal stimulus plans. Investors are betting Trump’s plans to cut taxes, expand infrastructure, immigration reform, and deficit spending as being pro-inflation. “If you block immigrants, or even illegal immigrants working in the states, wages will rise … if you block Chinese exports to the US prices will rise,” Tai Hui, chief Asia market strategist at JPMorgan Asset Management told CNBC.

However, with the expectation of inflation comes the assumption the Federal Reserve will raise interest rates. Higher rates would mean a stronger return on the dollar as the cost of borrowing increases. This reasoning only works if you ignore these three realities of our current economy expressed by Peter Schiff in his latest podcast:

1. Fiscal Stimulus Needs Monetary Stimulus

Increased government spending simply can’t occur without the Fed printing more money. Although some are seeing similarities between Trump and Reagan, our debt to GDP ratio isn’t anywhere near the same as when Reagan took office. The government can’t continue to borrow money while simultaneously raising the cost (i.e. interest) of borrowing that money.

“The reality is if we have bigger deficits as a result of tax cuts and more government spending, the only way for that to happen would be for the Fed to monetize it. The Fed would have to have even more monetary stimulus to offset or to make possible the fiscal stimulus … If the markets think we can increase the deficits the way we did under Reagan, yet it result in rising interest rates that helps the dollar or a tighter monetary policy, they’re crazy.”

2. US Debt Increase

It’s clear the Fed is in no position to fight inflation because of the enormous amount of current US debt. If they do decide to keep rates low, inflation will continue to weaken the dollar. If they decided to not monetize bigger debts for fiscal stimulus, the US would likely have to default on its loan, which won’t help the dollar.

“Any increase in interest rates that results in larger deficits would choke off the very recovery that people are betting on. If the Federal Reserve makes the decision to cooperate with the government, to monetize these much larger debts … the interest expense would grow dramatically on the national debt.”

3. Bursting the Bubble Economy

The economy Trump’s inherited from Bush and Obama is one temporarily propped up by an artificial recovery via low interest rates and quantitative easing. That fact doesn’t change simply with a new Commander in Chief. The irony is the economy desperately needs the tough love of a financial crisis to normalize markets and reset interest rates; however, they are likely to never do that voluntarily. It will take a complete collapse in the dollar.

“The mentality is we’re going to have more inflation; therefore, the Fed is going to fight that inflation by raising rates, and so the higher rates will mean a stronger dollar and that’s going to hurt gold. But what people don’t realize is that the Fed will not fight higher inflation. They will surrender. It’s inflation that’s going to win the fight, not the Fed. The Fed is not even in a position to step into the ring with higher inflation. The minute they try to fight inflation by raising rates, they crush the bubble economy.”

Even if the Fed follows through with a December rate hike, it’s likely to be insignificant when you factor in rising inflation, which will outpace interest gains. Real interest will go down despite nominal interest going up, even slightly.

All of this is good for gold, despite some suggesting inflation will help the dollar, a claim that runs against the most basic economic principle. Peter explains:

“None of that is possible without massive money printing on the part of the Federal Reserve. So now you have massive inflation. That is not good for the dollar. By definition that’s the dollar loosing purchasing power. It’s not bad for gold. I hear people saying, ‘We’re going to have more inflation so sell gold.” That doesn’t make any sense. If we’re going to have more inflation, you should buy gold.”

Highlights from the show:

“In addition to a larger deficit, because of lower tax revenue and more spending, the government would have to lay out more money to pay the interest not only on the new money its borrowing but on the new money its already borrowed.”

“Economic growth will generate some additional tax revenue just like it did under Ronald Regan, but it’s not enough to fully offset the full impact of the tax cuts. Of course you throw government spending increases into the mix, and these budget deficits could skyrocket well north of a trillion dollars a year.”

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