Certainly an attention-grabbing headline but a factual statement nonetheless.
So yes, Fasten your seat belts. King $$ is about to appreciate a lot more against all other major currencies. Here’s the How, the What and the Why.
Follow the interactive, in-depth Step-by-Step analysis of the prospects of a Higher US Dollar with a series of Q&A sprinkled throughout.
But first let’s start with 2 salient facts from which everything else spins.
- Under relentless pressure from the forces of its donor class (think moneyed elite) , the Republican-led US Congress is poised to push through the biggest deficit-financed Tax Cuts in history that will dwarf any tax cuts legislation ever enacted anywhere. We’re talking $1.5 TRILLION Big by the time it’s all said and done.
Operative word here is “deficit-financed”. hang on to it, for if it comes to pass, will be the sole reason why the Dollar goes higher.
2) Since the US is currently running a budget deficit, there is no money to pay for the cuts upfront. Coupled that with the fact that there are no free lunches, the only way to get the $1.5 TRILLION needed to finance the cuts is to borrow the money. But how and from whom?
Q: How Does The US Borrow The Money It Needs?
A: The US government typically borrows money by issuing a bunch of I.O.U’s (pronounced “I Owe You”) officially known as Treasury Bonds and are backed by its full faith and credit, meaning that the government is a credit-worthy borrower and typically relies on its AAA credit rating and its status as the custodian of the world’s ONLY Reserve Currency, to get the money it needs in exchange for very low returns.
Be that as it may, Treasury Bonds have to be sold and bought. And like any goods and services, there has to be a market of sellers and buyers in order to activate the laws of supply and demand. The established seller in this case is the US Treasury and the buyers are “who’s who” of international lenders. The bonds are auctioned off through Wall Street dealers.
As of March 2016, the U.S. government owes almost $19 trillion to creditors in both long and short term debt and this figure does not include the projected $1.5 Trillion it will cost to finance the tax cuts
Q: From whom does it borrow? Who are the Bonds buyers. More precisely, Who are the willing lenders?
A: Simple answer is: Not Americans. Americans are notorious for their over-the-top consumption and not so much for their penchant to Save money. Simply put they spend Big and Save very little. 75% of Americans have less than $2000 in Savings. Consequently they have No money to buy their own government’s T-Bonds and own their own debt.
Q: If not Americans, then Who?
A: Again the simple answer is: International lenders mostly foreign governments seeking reserve currency
Q: But why are foreign lenders lining up and eager to fork over their cash to the US government in exchange for meager rate of returns?
A: Answer is: The rest of the world needs to hold reserve currency as a means to pay off their international debt obligations. And the mighty dollar is the ONLY Game in Town (ie, the only Reserve currency) consequently, other Central Banks are competing for a finite amount of Dollars.
But in order to buy Dollar-Denominated US T-Bonds and hold paper dollars in their Treasuries, they first have to convert their local currencies into Dollars. This means that international buyers (mostly foreign governments) have to swap their currencies for US Dollars which in turn activates the Dollar Supply & Demand and as a result increase its value, for You have too many people chasing a limited supply of paper Dollar. Classic Supply & Demand theory at play. This explains why the $$ may be on its way to astronomical levels
Why is an ultra-strong Dollar bad for the US Economy and by extension the world Economy?
Answer: A strong currency is not in the best interest of any nation. In fact currency devaluation has become a competitive sport amongst nations seeking competitive advantages. This is how China managed to go from a 3rd world economy to the second largest economy in the world in just 30 years. Thanks to its exports to the rest of the world.
As the world’s biggest economy, the US is also home to the biggest multinational corporations. These corporate giants have setup shop in just about every corner of the world and employ more than 60% of all American workers. They also pull in more than 50% of their quarterly revenues from their oversees operations. Those revenues must be converted into Dollars and repatriated back to the US. Consequently, the stronger the dollar, the bigger the hit is on their profit margins. A strong Dollar eats into those profits. Consecutive declines in corporate quarterly profits usually spells doom for the entity and US corporations are notorious for cutting their headcounts (think massive layoffs) at the first sign of trouble.
Enter the consumer.
I alluded earlier to the fact that 70% of US economy relies on the consumer. So as goes the consumer, so does the the rest of the Economy. But to consume, a consumer needs money to buy the goods and services he/she needs. Having disposable income usually comes from being employed. Since the aforementioned strong dollar is forcing corporations into massive layoffs, there goes the income the consumer relies on for much of his/her needs. It’s a whirlwind cycle that feeds onto itself.
Disclaimer:
I am not an Economist by any stretch. Not even close. I am sort of a fake Facebook Economist. But more often than not, my curiosity is good enough for perspective on a lot of kitchen table issues that directly affect the masses.
So while you can trust my analysis and judgement on these issues, I urge you to please ALWAYS, Verify for yourself 😊
The problem i find with most real economists is that they don’t speak your language — -figuratively speaking. So I feel compelled to serve as a buffer between you and them..
