Say Goodbye To The “Strong Dollar Policy”

It is absurd to believe that the inhabitants of the Eccles building in D.C. promote a strong dollar policy. Printing $3.8 trillion dollars and keeping interest rates at zero percent for going on the seventh year can hardly be confused with a hard-currency regime. Merely pretending to cheer the dollar higher appears to be the Fed’s method of operation.

But since World War II every administration likes to pledge their support for a “strong dollar policy”. However, the truth is this policy has only truly been practiced in the United States on very rare occasions. The courageous Fed Head, Paul Volcker, raised interest rates to the dizzying level of 20% in order to squeeze inflation out of the economy in the early 1980’s. During his tenure the intrinsic value of the dollar increased and the economy thrived.  This is because, contrary to what the Keynesians who currently run our economy believe, a strong dollar is great for America; while a weaker dollar is most efficient at destroying the purchasing power of savers.

A weak currency doesn’t boost GDP or balance a trade deficit—a philosophy that governments and central banks now embrace with alacrity. Take Japan, which still has a 660 billion yen trade deficit two years after Shinzo Abe unleashed his all-out assault on the yen, which is down a staggering 40% against the dollar since January 2013. This, after a 50-year average trade surplus of 382 billion yen prior to his reign.  And, in its 25th month of massive currency depreciation, Japan still finds itself in an official recession.

However, despite these facts Keynesian logic favors a currency debasement derby to the bottom. This is because they maintain that a weak currency stimulates exports, boosts manufacturing and leads to lower rates of unemployment. So with the dollar rising over 15% against the Euro and the Yen since July of 2014, it is no wonder we see a renewed fear of the stronger dollar, as it plays into their number one fear of deflation. We got the first hint of this from the U.S. Treasury Sec., as he explained that the current dollar strength is more the result of yen and euro manipulations, and less about the intrinsic dollar strength. Treasury Secretary Jack Lew said this in Davos Switzerland last week: