The Strong Dollar Illusion
Aug 18, 2008
Economists who now see American
troubles spreading around the world are predicting that foreign
central banks will ignore the gathering inflation threat and
follow the Fed down the rate cutting path. Similarly, they argue
that since the downturn began here, the U.S. recovery will likely
be underway while the rest of world is still decelerating. These
assumptions have prompted a rally in the dollar, a sell-off in
gold, commodities and foreign stocks, and have cast doubts on
the ability of foreign economies to "decouple" from
the United States. Investors should not take the bait.
America does indeed pose a global threat, but not for the reasons
these economists suppose. Foreign economies are suffering not
because Americans have slowed their voracious spending, but because
they are defaulting on hundreds of billions of dollars of existing
loans underwritten by lenders around the world.
The conventional wisdom is that foreign economies depend on Americans
to buy their exports. This is false. The global expansion of
the past decade has created new demand everywhere, and people
and businesses in all corners of the world are spending. However,
in America, spending has largely been achieved through a massive
vendor financing scheme. Foreign supplied credit has allowed
Americans to continue buying, even while American income and
savings have dropped. As this credit goes bad, the losses are
landing on the bottom lines of foreign financial firms. In other
words, the global pain is not resulting from American contraction
but from having financed our preceding expansion. This is a critical
distinction few have been able to make, and it is vital to appreciating
the decoupling that has already occurred beneath the surface.
The current losses that banks in Europe and Asia are now suffering
are real, but future losses can be avoided by suspending future
lending to Americans. Shutting off this credit will of course
torpedo the dollar, but that is precisely what must occur. By
allowing the dollar to drop to its natural, unsupported level,
not only will the American caboose be decoupled from the global
gravy train, but the rest of the cars will move along the tracks
much faster. Absent the U.S., there will still be plenty of consumers
to buy what is produced, and plenty of investment opportunities
for those with savings. Rather than dragging the global economy
down, such a development would actually un-tether it.
On the other hand, left to its own devices, the American economy
will implode. There will be fewer products for American consumers
to buy and very little savings for anyone to borrow.
Some foolishly believe that many of the world's problems result
from dollar weakness, and that pushing the dollar back up would
be good for all. For example, since the weak dollar is contributing
to the rise in oil prices, a stronger dollar should help bring
prices down. However, if foreign governments weaken their own
currencies to push the dollar up, they will simply succeed in
bringing oil prices down for Americans. Oil prices will go up
for their own citizens. This can't be an attractive bargain for
any European or Asian political leader.
The weak dollar is merely a manifestation of substantial structural
problems underlying the American economy. Unfortunately for us,
the solution to those problems, as well as the global economic
imbalances, can only be found in a weaker dollar. Efforts to
artificially prop the dollar up will only exacerbate those imbalances,
and make its ultimate fall that much more severe.
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
to buy a copy today.
More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free
research report on the powerful case for investing in foreign
equities available at www.researchreportone.com, and subscribe to
my free, on-line investment
Aug 15, 2008
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.