Say Goodbye To The “Strong Dollar Policy”
It is absurd to believe that the inhabitants of the Eccles building in D.C. promote a strong dollar policy. Printing $3.8 trillion dollars and keeping interest rates at zero percent for going on the seventh year can hardly be confused with a hard-currency regime. Merely pretending to cheer the dollar higher appears to be the Fed’s method of operation.
But since World War II every administration likes to pledge their support for a “strong dollar policy”. However, the truth is this policy has only truly been practiced in the United States on very rare occasions. The courageous Fed Head, Paul Volcker, raised interest rates to the dizzying level of 20% in order to squeeze inflation out of the economy in the early 1980’s. During his tenure the intrinsic value of the dollar increased and the economy thrived. This is because, contrary to what the Keynesians who currently run our economy believe, a strong dollar is great for America; while a weaker dollar is most efficient at destroying the purchasing power of savers.
A weak currency doesn’t boost GDP or balance a trade deficit—a philosophy that governments and central banks now embrace with alacrity. Take Japan, which still has a 660 billion yen trade deficit two years after Shinzo Abe unleashed his all-out assault on the yen, which is down a staggering 40% against the dollar since January 2013. This, after a 50-year average trade surplus of 382 billion yen prior to his reign. And, in its 25th month of massive currency depreciation, Japan still finds itself in an official recession.
However, despite these facts Keynesian logic favors a currency debasement derby to the bottom. This is because they maintain that a weak currency stimulates exports, boosts manufacturing and leads to lower rates of unemployment. So with the dollar rising over 15% against the Euro and the Yen since July of 2014, it is no wonder we see a renewed fear of the stronger dollar, as it plays into their number one fear of deflation. We got the first hint of this from the U.S. Treasury Sec., as he explained that the current dollar strength is more the result of yen and euro manipulations, and less about the intrinsic dollar strength. Treasury Secretary Jack Lew said this in Davos Switzerland last week:
"The strong dollar, as all my predecessors have joined me in saying, is a good thing. It's good for America. If it's the result of a strong economy, it's good for the U.S., it's good for the world. If there are policies that are unfair, if there are interventions that are designed to gain an unfair advantage, that's a different story."
We see multi-national companies playing right into this theme. These companies are now using the strong dollar to replace last year’s harsh winter as their excuse for not making the numbers. The plethora of companies that missed earnings this season are all blaming it on currency translation--leading to the new buzz phrase of 2015…Constant Currency. Constant Currency is when last year’s earnings are re-translated to this year’s rates to strip out the effects of currency dynamics.
First, we have the construction and mining equipment giant Caterpillar (CAT), who reported a lower profit that came in well below expectations. This was due primarily to the recent drop in the price of oil and lower prices for copper, coal and iron ore. But of course they had to mention “The strong dollar didn't help either…it seems like when it rains it pours, and this is one of those days." Then, of course, the Caterpillar CEO urged the Fed to hold off on any rate hikes this year.
Procter & Gamble CFO Jon Moeller told CNBC that the strong dollar was the major factor in the company's disappointing earnings report last quarter. And we heard similar stories from 3M, Pfizer, United Tech and Amazon; just to name a few.
This appears to be a legitimate excuse, until you ask yourself--is the problem that the strong dollar is hurting their earnings, or is it that they no longer have a weakening dollar making it easier to beat the estimates. After all, I didn’t hear these same companies offer this excuse when the weakening dollar was helping their profitability? Currency translations work both ways.
The truth is politicians and multinationals alike enjoy a weakening dollar because they don’t have to work as hard. A weak dollar allows politicians to do what they do best--spend money without having to raise taxes. And a weak currency allows multinationals to appear more profitable, as they enjoy gains when stronger currencies are translated back to a weakening dollar. After all, how many times did we hear the term Constant Currency during the 2002-2008 timeframe for example, when the dollar was plummeting in value?
Keynesians cling to the belief that a weak currency is the corner stone for building a healthy economy. But I believe this fatuous notion is a ruse that stems from the necessity to find a justifiable excuse to give central banks carte blanche to monetize debt. For without an activist central bank aggressively printing money to purchase sovereign debt, interest expenses would soon spiral out of control—a falling currency is just an ancillary side effect of supplanting the free market for government issued debt.
Therefore, it is my prediction that Yellen will not be able to raise rates and will soon have to adopt a very bearish stance towards the dollar. After all, a hawkish interest rate policy is untenable for a Fed that is now paralyzed with the fear of deflation, especially while the rest of the world is frantically printing money. Our central bank will not have the courage to allow the dollar’s rise to continue. And, it is inevitable that Yellen and her comrades at the Fed will soon follow the lead of our Treasury Secretary in talking the dollar down. That may be music to the ears of multi-national corporations and our government; but will be the death knell for the middle class.