Welcome to the Era of Less Bang for Your BuckJames Cordelaine
Let’s admit it – we’ve grown used to a high-flying dollar. We’ve been spoiled. With our rewards cards, savers coupons, Black Fridays, Saturday shopper specials, and online promos and discounts, we’ve come to believe there’s no purchase so big we can’t snag it for less if we’re patient and stealthy enough.
Why not? The dollar has immensely elastic purchasing power. We continue to think we can get more bang for our buck – particularly when we buy products manufactured abroad. The prevailing propaganda from the financial press, economists and seasoned investors has been the dollar is getting stronger and stronger.
According to one writer, an increasing number of analysts at prestigious firms like HSBC and Italian lender Unicredit are calling for a much softer dollar in 2016. The change in thinking was spurred by the March Fed Open Market Committee (FOMC) meeting. The FOMC is the branch of the Federal Reserve that decides monetary policy, including whether or not to raise interest rates. Once the Fed announced only two very small rate increases for the remainder of the year, analysts did a quick retake:
“This is a big deal as a good chunk of fundamental support for the [US dollar] has been removed – the very reason the US dollar was such a strong performer in 2015 was because traders assumed it would benefit from higher interest rates in 2016.”
BloombergBusiness confirms this outlook by pointing out market traders now have strong doubts about how much longer Fed policy can continue to differ from central bank policy in other countries. Both the U.S. dollar index and the broad index (the value of the U.S. dollar compared to the value of other world currencies) are down five percent from their recent highs.
The foreign press has also begun to express skepticism about our Fed’s policies. Journalist Karen Maley in Australia’s Financial Review suggests Fed Chair Yellen’s motives in lowering expectations of future rate increases were to help bolster stateside equities markets and to push the dollar lower against other currencies.
As Maley sees it, Yellen appears to have succeeded on both counts. Her speech helped the U.S. stock market score its fifth week of gains, and the U.S. dollar slid dramatically against other currencies. Yellen’s clear message to foreign governments, particularly China, was they could ease up on the devaluation of their own currencies.
It’s apparent from this monetary horseplay central banks will continue to play politics with currencies as long as we’re stuck in a suppressed global economy. They will continue to intervene and attempt to compensate when market output is below par. Welcome to the new era of less bang for your buck!
To build personal wealth, we need a better alternative than dollars or other fiat currency. Central banks manipulate and play politics with fiat currency. But when it comes to their own security and solvency, they store gold. Doesn’t it make sense to follow the example of what they actually do rather than fall prey to their politics, and hope and pray for a better return on your dollar?