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Putting a Damper on the Dollar

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President Donald Trump put a damper on the dollar earlier this week when he claimed, in a Wall Street Journal interview, it was “getting too strong.”

“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting — that will hurt ultimately … It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.”

After his comments, the dollar index dropped 0.7%.

During an interview on CNBC’s Future’s Now, Peter Schiff said Trump’s comments on the dollar were correct but insisted the president doesn’t understand the reasons behind it or its actual impact on the economy.

“Well, I believe he’s correct. The dollar is overvalued, but he’s wrong in his view about how the overvalued dollar impacts the US economy, at least in the short-run. And because the dollar is overvalued, we have an artificially high standard of living. I think that when the dollar does decline, it’s going to take the US standard of living down with it.”

Trump alluded to the impact of a strong dollar on trade, saying it makes it difficult for America to compete. It’s true that a strong dollar effectively makes American products more expensive. That puts a damper on exports and encourages the importation of cheaper foreign goods – ergo a trade deficit. This is the crux of most arguments against US trade policy, and it’s the basis for Trump saying the US is having a tough time competing. But Peter digs down to a deeper level, explaining that the artificially propped up dollar creates an even bigger problem – a fake wealth effect.

“These trade deficits, in the long-run they’re terrible for because we’re spending ourselves into bankruptcy because we’re borrowing to consume, but in the short run, we benefit because we get to enjoy greater consumption than our productivity would allow. It’s our foreign trade partners that are subsidizing us.”

But why is the dollar so strong in the first place? Well, it has less to do with the world’s confidence in Trump and more to do with US monetary policy – a policy that is creating all kinds of bubbles.

“We want a dollar to be valued based on the fundamentals, and the fundamentals of the US are lousy. The dollar should be a lot lower. But because it’s a reserve currency, because a lot of speculators buy the dollar, the dollar is higher than it should be, and Americans enjoy a standard of living, at least temporarily, that’s out of whack with their actual productivity. And so this is another example of ‘be careful what you wish for’ because when the dollar goes down, our problems are going to exacerbate.”

Once again, we find ourselves staring down the barrel of the Federal Reserve. It’s actions and interventions have propped up the dollar. Now, the central bank wants to “normalize,” but it’s between a rock and a hard place. If it raises interest rates, it’s going to let all the air out of the bubble and that wonderful standard of living Americans have come to expect will vanish like a cloud of steam. Even a slow rollback of easy money could cause a massive “taper-tantrum.” On the other hand, the Fed really can’t keep rates artificially low forever. And it has no place to go to “respond” to the next recession.

But there is a silver lining. And a gold lining, as Peter points out.

“What Janet Yellen has done and what she is going to do is going to make me a lot of money. And it’s going to make people who have been following my advice a lot of money. It’s already started. Look at the price of gold this year. It’s up about 12%. It’s up triple what the Dow is. Emerging markets – same story. They’re about tripling the gains of the Dow. And this is just the very beginning. Because as the air comes out of this bubble, and as all the damage that 8 years of 0%, or near 0% interest rates have done to this economy – when Janet Yellen goes back to the drawing board on QE4, as she lowers rates and launches an even bigger quantitative easing program than the last three combined, the bottom is going to drop out of the dollar, gold is going to take off, and then people are finally going to see the real damage that has been done to this economy with this reckless monetary policy.”

 

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