A client writes: “Clif, do you have any views on debt levels and currencies? How much is the weakening US dollar impacting on the US economy? It just seems strange that in the best performing advanced global economy that its currency should continue to weaken. What of the possible melt up taking the stock market all the way up to the Sep./Oct. 2014 time period whilst under deflation and then selling off when a new 60-year cycle starts in 2015 with rising inflation? I am assuming inflation won’t be good for stocks a' la 70’s rising yields.”
Answer: I'm not sure that the weakening U.S. dollar is having as much of a negative impact on the economy as it did, say, in the years leading up to the credit crisis. At that time the falling dollar was adding to the upward pressure on commodity prices, particularly oil, which put strain on the economy and fed into the crisis. This time around commodity prices are relatively low; in fact many commodities seem to be ignoring the dollar weakness and are still in decline -- including gold.
One could also make the case that a weak dollar is part and parcel of the Fed's QE3 program. Some have even called QE3 a de facto weak dollar policy. It's clearly been a boon for equity prices and may have done more help than harm this time around.
As for the years after 2014, it's hard to predict exactly how a continued weak dollar might impact the economy. My guess is that it will take a while for inflationary pressures to build – possibly a few years – so there could be room for additional dollar weakness before it weighs on the economy.