I have stated before that no country in the history of the world has gotten wealthy and prosperous by self devaluing its own currency. This is the exact policy that Geithner and Bernanke are following.
No one can possibly make the point that a weaker dollar is actually good for America in the long run. Sure, PG, IBM, and the Tax Payer Sellout US Chamber Of Commerce make boat loads of money off of a weaker dollar, but what about the rest of us?
Nobel Prize winning Economist Paul Krugman, a man whom I have tremendous respect for seems to think that a weaker dollar is good. Yes it is for exports, but what about imports? Its Seinfeld all over again. You have to balance exports with imports. That is the problem. We are always in a state of imbalance. Furthermore, the only thing the US is currently exporting are bad cars and even worse Financial Engineering. What ever we are exporting foreigners don't want. So the theory that a falling dollar is helping exports doesn't fly as long the economy is leveraged to complex financial products.
A stronger USD is just good business. Its psychologically important. I am not naive to understand that there are trillions in unfunded Medicare/Social Security benefits that need to be accounted for. That is why they need to continue to print money and issue Treasuries. This unfortunately kills the dollar. What good is it to save the fort when the country is burning down? Our elected officials don't realize that Rome is indeed burning, but are much more worried about the Coliseum.
In the 1970s, Presidents Nixon, Ford and Carter pursued a weak dollar policy, and the result was a 17% S&P 500 return made negative in real terms based on the dollar's decline.
Much the same has occurred this decade amid weak dollar policies sought by the Bush and Obama administrations.
Looking at the 1980's and 1990's, something different occurred altogether. Reagan and Clinton both felt a strong dollar was in the nation's national interest, and the market result was a 121% S&P return under Reagan, and a 208% return under Clinton.
What can you decipher from this?
Periods of currency strength correlate with powerful equity returns that lift the fortunes of every day hard working people in our country who will never be technically wealthy.
We also need higher taxes. Why you ask? For the same reason that a stronger USD equates to stronger growth and prosperity. The economy and stock market does better when taxes are raised. President Reagan raised taxes in 1982, what happened to the economy and the stock market after words? President Clinton was murdered by Congressional Republicans over his Tax Increase in the early 90's. What happened to the economy and stock market subsequently?
The Republicans want you to believe that increasing Marginal Tax Rates will be certain death. OK...lets go to the figures.
During the 8 Reagan years, when marginal rates were sharply cut but deficits were substantial, equities on the NYSE and the SP 500 about doubled.
During the Bush 41 years, when the top marginal rate was increased, equities rose about 50%.
During the Clinton Years, when tax rates were substantially increased, equities tripled, deficits turned into large surpluses as far as the eye could see.
The market today is roughly where it is when Nitwit Bush 43 took over, who cut marginal tax rates, but ballooned the deficit.
So, Bush 41 and Clinton raised Marginal Tax Rates without tanking the economy, and Clinton left Bush 43 with a shangra-la fiscal situation.
So much for the Republican/GOP argument that reducing Marginal Tax Rates is the bliss of tax/economic policy and raising Marginal Tax rates is its coffin.
When did ideology substitute reality? When did it trump the actual figures?
For Conservatives to give up on the Tax Cut policy is to give up the last thing they stand for. Its a religious war for them. Their entire self interest is so attached to this ideology that it is separated from realty at the end of the day
If you don't believe me all you have to do is your own research.
The powers that be want you to believe in the hype of tax cuts.
Its simply not true.
Figures don't lie but liars always figure.
I happen to disagree with some of your assertions. Granted, it just may be worth it's weight in paper, but a weak dollar is exactly what the US needs now. Allow me to "bullet point style" enumerate the reasons.
ReplyDelete1) Weak USD allows economic default (i.e. not technical default) of US Treasuries. The Treasury/Federal gov't just owes too much money. Paying this debt back in cheapened USD is nice.
2) Exports less imports = Trade surplus/deficit. Exports don't have to equal imports. Look at China! If you believe the US condition so poor (as you state, once again I'm a disbeliever), why would following China's macroecon policy be worse? They have a cheapened/devalued yuan, and export. Shouldn't we be addressing this original imbalance? Granted, the better way is to reduce consumption, export more, etc. But we're just too lazy to compete on that level. For now.
3) The Great Depression was arguably exacerbated by tax increase. Most economists will agree that adding weight to an already weakened horse just ain't good. Rev the economy up. Wait for surplus. Tax it. Pay down the federal deficit. Wash, lather, rinse, repeat.
I have so many counterpoints, but I'd like to open with these few.
Hedge Fund Investor
ReplyDeleteFirst of all.
Thanks For reading the blog and leaving a comment.
But…
…Please answers me this question.Has any country in the history of modern or ancient times everbeen more prosperous and wealthy by continuing to devalue its own currency in the long run? Short run anything can happen as we have seen. There are so many global imbalances prevalent that somewhere there is arbitrage profit to be made, and considering that Wall Street has a license to loot the tax payer and have the governments guarantee to do it.
Long run its economic suicide. I have yet to read anywhere that is in America’s long term Geo-Political/Economic interests.
Your first point makes a distinction about technical default and economic default. The dollar would have to further devalue another 75% or so before a full economic default is consummated. I am maybe off by a little, but the sheer magnitude of the level of debt makes this unreasonable. Do you think that is wise on any level? Why not take it on the chin and technically default? This is what the Japanese never did, and Greenspan, Summers and the bunch killed them for it. What’s good for the goose you say?
ReplyDeleteWhat you are saying is to further devalue the USD to cheapen past, current, future toxic debt load? I don’t know where to begin here. Sorry. That is the recipe for financial Armageddon. The debt is toxic. The debt is sliced and diced into other more volatile derivatives. You can’t kill 300MM Citizens to save a few knuckleheads.
Not only that you make the distinction that we can actually pay back all of this debt? This is not happening in the next 3 lifetimes.
2-You make a very good point. All I am saying is a weaker dollar even though helps the trade imbalance; you are just creating another imbalance somewhere else. The average every day American sees no benefit to a lower dollar. The US Condition is in grave danger. Rome is burning my friend. The reason we don’t put any overt pressure on China to revalue is because we have to sell them Treasuries. Also everyone knows their economy is a ponzy scheme. They will have to revalue their currency in the near future or risk grave retaliation from the Europeans and US.
ReplyDeleteI stand by my statement that the only thing US exports are bad cars and even worse financial engineering. Furthermore, The US Consumer is in a secular deliberating cycle. Other then tax credits, stimulus, and cash for clunkers there is zero end market demand.
3- The last point you make about the Depression many make. The Great Depression was made worse by the inherent slack of leverage and debt that was never properly taken care of. There was no regulation what so ever. Those two were the biggest causes add in deflation and we have powerful cocktail. Higher marginal taxes people like to use as an excuse. Of course it had an effect. MTR went from 73% in 1921 all the way down to 25% in 1931. Wonder why we he had the roaring 20’s? Wonder why people levered up? Took on more debt? The rate then went from 25% in 1931 to 63% thru 1935 and finally topped out 94% in 1945. The sudden obscene rate hike form 25 to 63 made things much worse, but it was getting worse anyway. What I am saying is not to hike rates to 63%. Heavens no! Just bring it back to where it was under Clinton..39%. That is a 4% increase which will alleviate a lot of the current stress.
Also they are not revving the economy back up. They are just relating old bubbles. Housing is a total government backed joke. Foreclosures and ARM Resets are going to humble the sector.
ReplyDeleteUsing the Depression is accurate as we just went though a horrible period, but you can’t argue with the facts.
Reagan lowered the MTR when he got into office, but quickly realized with the urging of Volcker that these deficits were unsustainable. Then came the Tax Increase Responsibility act in 1982. What happened with the economy? Stock market the next few years. I know 87, but you remember Clinton sharply raised taxes from 31% to 39% coming out of the early 90’s recession and S&L Crisis. He was politically murdered. What happened to the economy and stock market throughout the 90’s? Bush lowered the MRT. What happened to the economy and Stock Market?
What’s happening today is deficits are unsustainable. Lots of people think we are spending too much, totally the opposite, read the CBO website and it tells you that spending is not as bad as people think it is. It’s the Velocity of Money that is killing our economy and the US Consumer.
It was nice chatting with you.
Let’s continue this and pick it up.
I enjoy it really well
Thanks
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ReplyDelete