Well, that may have been true
of the dollar until we went off the gold standard in the 1970’s.
It seems that the French were taking all the dollars that
US troops were spending in Vietnam and rushing to turn them
in for gold. Then President Nixon was informed that we were
running low on gold and he had to close the window, thus rendering
the dollar only as good as anyone perceives it to be. That
perception has taken a beating recently, as the dollar has
fallen about 11% against the Euro just this year. Part of
this is due to foreigners wanting to diversify into other
currencies. The other part is the fact that interest rates
are being raised by the Bank of England, The Bank of Japan
and European Central Bank. This puts more pressure on our
Fed to raise rates to keep foreigners financing our deficits.
Investors in dollars must be concerned about a further drop
in the dollar as they cannot continue to lose money in this
manner. On the other hand, none of the other major currencies
in the world are backed by anything other than good faith
either. We are still the largest and strongest economy in
the world and although the value of the dollar may decline
further, we do not foresee a collapse.
On the positive side, the weaker dollar will make our goods
and services cheaper overseas thus stimulating our exports
and helping to narrow the trade gap. Those companies that
stayed home rather than invest millions of dollars in overseas
plants will be major beneficiaries. In addition, instead of
traveling to Europe on vacation and spending $6 on a cup of
Starbucks, Americans will stay home and spend their money
here. Further, with a weaker dollar more foreigners may decide
to vacation here and spend money.
You may have noticed recent strength in the price of gold
and other commodities (notably crude oil). A weaker dollar
makes commodities more expensive because it takes more dollars
to buy the same amount of these assets.
US Treasury Secretary Henry Paulson recently said “a
strong dollar is clearly in our nation’s interest.”
Several previous Treasury Secretaries have expressed similar
views. Coincidently, Secretary Paulson is preparing for a
trip to China accompanied by Fed Chairman Ben Bernanke and
five cabinet members. They will be engaging the Chinese on
a number of economic issues including a revaluation of the
yuan. It will be interesting to see if anything positive comes
of this historic meeting.
The Fed meets on Tuesday (we will be at the printer) and
we expect no change in rates. The Fed still expresses more
concern about inflation than slow economic growth. The Fed
is determined to keep core inflation (minus food and energy)
near 2%. Congress seems to have forgotten that they passed
the Full Employment Act shortly after World War II that stated
a goal of 3% inflation and 3% unemployment. The full employment
goal now seems to be 6% unemployment. In any case core inflation
is currently below 3% and the unemployment rate is 4.5%, both
acceptable numbers. The new jobs created number came in today
at 132,000, above expectations. We are creating more jobs
than we are losing, it’s just that the new jobs being
created are in the service sector and that does not make headlines
like GM laying off 38,000 workers. The definition of a job
is gradually changing as we become a nation of self employed
entrepreneurs or people contracting out their services.
In short the economy is fine and inflation is under control.
Money is the engine that drives the economy and the world
is awash in money right now. Interest rates are low on a historical
basis – 6% is more the norm over a long period of time
(dating back to the Roman Empire actually).
Have you been to the movies lately? Hollywood seems to be
falling all over itself producing anti-business films. The
irony here is that the actors and those producing these movies
are making the obscene amounts of money that they re criticizing.
Sort of like biting the hand that feeds you.
Oops! We neglected to cite our source in last month’s
letter about the auto bubble in Venezuela. It was from the
New York Times.
It’s that time of year again and we extend our best
wishes to all of you for a happy and peaceful holiday season.
Random thought for December 2006:
Every day more money is printed for Monopoly than the US
Treasury. Some may wonder if there is a difference.
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