The dollar has come into the crosshairs of the new president in recent weeks.
Let’s talk about what’s happening and why it matters.
First, it’s highly unusual for the U.S. President to comment on the dollar. The Fed doesn’t even comment. If they do it’s in an indirect way. It has always been a topic deferred to the Treasury Secretary. And the consistent message there has been, for a long time, that we are for a strong dollar.
Things have changed. Or have they? In mid-January, President Trump told the Wall Street Journal that the dollar was “too strong.”
The markets have had a hard time trying to reconcile this comment and stance taken by the administration. But we have to keep in mind: The new president has been a bit less than measured in his words.
When the Fed is in a hiking cycle and other major central banks are still in QE mode, capital will continue to flow into the U.S., and you’re going to get a stronger dollar. When you incentivize U.S. corporates to repatriate a couple trillion dollars they have offshore, you’re going to get a stronger dollar. When/if you pop growth to 4%, you’re going to get higher rates, faster, and you’re going to get a stronger dollar (especially when that growth will lead the rest of the world).
So what is this jawboning on the dollar all about?
As we know, Trump has had an early focus on trade. And he’s used displeasure with trade deficits with countries as a bargaining chip to start conversations about more fair trade terms. But while many have been pulled into the fray over the past few weeks (like Canada, Mexico, the euro zone, etc), this is all about China. My guess is he’s using Mexico as an example for China.
We’ve heard a lot about the $60 billion trade deficit Mexico. It is our third largest trading partner. But that deficit is peanuts when compared to China. Same can be said for Japan, Germany and Canada, three of our other largest trading partners. With China, however, we buy about $483 billion worth of goods. And we sell them only about $116 billion. That’s a $367 billion deficit.
The problem is, it never corrects. It continues, and will continue, unless dealt with. Currencies are the natural trade rebalancer. And with China, it doesn’t happen because they outright dictate the exchange rate. The cheap currency has been/and continues to be its economic driver–and it’s the unfair competitive advantage that has crippled the global economy over time.
Consider this: Over the past 20 years, China’s economy has grown more than fourteen-fold! … to $10 trillion. It’s now the second largest economy in the world. During the same period, the U.S. economy has grown just 2.5x in size. And in the process a global credit bubble was formed. China sells us goods. We give them dollars. China takes our dollars and buys U.S. Treasuries, which suppresses U.S. interest rates and incentivizes borrowing, which fuels more consumption. And the cycle continues.
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