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.
