The U.S. dollar has become the safest asset, in the face of mounting evidence that competitive devaluations and drowning structural problems in liquidity are coming to a close.
The U.S. dollar is strengthening because of the evidence of a deeper slowdown in China and the massive imbalances built by some emerging economies in the past—large fiscal and trade deficits financed with the cheap inflow of dollars.
As the U.S. economy improves and others face the saturation of past monetary and fiscal stimulus, it is only logical that the United States sees a high inflow of funds from abroad.
And that is good. It keeps Treasury yields low, maintains a high demand for bonds and equities, and provides a steady increase in capital investment into the U.S. economy.
Strong Is Good
But there are many who think that the U.S. economy cannot handle a strong dollar.
Allow me to question that philosophy. The United States only exports around 12 percent of GDP and less than 30 percent of the profits of the S&P 500 companies come from exports.
In the past nine years, devaluing the currency and lowering rates has hurt the middle class, savers, workers, and high-productivity companies. Many of the disadvantaged voted for the current administration to make a drastic change and not repeat these past mistakes.
A devaluation policy hurts more Americans than it helps. Devaluation is simply stealing from your citizens’ savings and disposable income.
A strong dollar reduces inflationary pressures and keeps interest rates low. Both effects are positive for savers, workers, and families as the economy strengthens and wages improve.
A strong dollar is also positive for the government and companies. Capital and foreign direct investment flow to the United States, and corporations and government borrowing costs are kept low by rising demand. Corporations can also make international acquisitions at a cheaper cost, both in lower rates and currency adjusted.
Most U.S. companies sell little abroad, but more than 80 percent of their foreign sales are currency hedged. We have to look past the headlines of Boeing and Harley Davidson and consider the whole economy.
A sound monetary policy and defense of a strong currency are good for the vast majority of the economic agents of an economy. No country has collapsed due to a strong currency. Many have fallen due to constant destruction of the purchasing power of their currency.
High added-value sectors do not need the disguised subsidy of devaluation to export more. And these account for the vast majority of U.S. exports.
A sound monetary policy and a strong currency are also essential to keep the world reserve currency status. If a small proportion of the U.S. economic sectors suffer from a strong dollar due to low competitiveness, it is a price worth paying in exchange for being the world’s most used currency, a reserve of value and a worthy investment for the rest of the world.
Adhering to the mantra of monetary expansion and devaluation will not work if the goal of economic policy is to strengthen the domestic market, increase disposable income for the middle and lower classes, and end the perverse incentives created by years of failed demand-side policies of the Federal Reserve and the Obama administration.
If the current administration wants to defend American jobs, workers’ wages, and families, a strong U.S. dollar will be proof that it is achieving its goals.
The greatest mistake is to follow beggar-thy-neighbor devaluation policies to disguise structural imbalances. After decades of industrial plans, fiscal expansion, monetary stimulus, and ultra-low rates, historic problems will not be solved by seeking further imbalances.
Devaluation is not a tool for exports. It is a tool for cronyism and always ends with the demise of the currency as a valuable reserve.
Daniel Lacalle is chief economist at hedge fund Tressis and author of “Escape From the Central Bank Trap,” published by BEP.