President Trump’s election appears to have set up the dollar for a substantial decline, as this reality sinks in. His policies are being exposed as bombastic and autarkic. By isolating America from the benefits of world trade, she gets almost no benefit from the rapid transformation progressing the Asian continent from economic backwater to economic powerhouse.
Meanwhile, the accumulation of debt is unproductive and a burden on the economy, still financing wasteful government deficits, and inflating consumption. Consumers’ income has failed to keep pace with the cost of living for at least the last two credit cycles. And with the consumer becoming overburdened with a legacy of debt, the economy is struggling, no longer in crisis, but going nowhere.
Those analysts who unwisely think trade protectionism will create American jobs fail to understand that trade deficits arise from a combination of government deficits, the expansion of bank credit, and low savings. Yet these are the policies the government and the Fed are actively pushing for economic recovery. Consequently, the budget deficit next fiscal year is likely to be another $500bn, which we can add to the running total.
For the dollar’s prospects, the most important thing to know is that since 1980 the accumulated deficit on the balance of payments, of which the balance of trade is the major component, will have totalled over $11 trillion by the end of this year. The accumulated balance of payments deficit serves as an indication of the scale of foreign ownership of dollars, only $4.36 trillion of which is identified in central bank reserves around the world. Much of the balance of foreign-owned dollars is owned by businesses, engaged in global trade.
The management of dollar balances is crucial for these businesses’ profitability. They will have noted that on a trade-weighted basis the dollar peaked in January, and since then has lost 7.5%. That is a severe impact on profits. They will be on the alert for further signs of weakness, and will have noted the improving trade prospects for Europe and the Eurozone, which have driven the euro up against the dollar by 15% this year. Furthermore, the Eurozone is running a trade surplus of an estimated €200bn for 2017, leading to an underlying contraction of euros in foreign ownership. The Chinese renminbi (or yuan), has risen 7.3% against the dollar this year, affecting corporations trading with China. Most importantly, it affects oil producers selling into their largest single market. They will be watching the dollar’s progress from here.
There is little doubt that the non-US world owns substantial quantities of the dollar, and can be spooked into selling. For this reason, the poor relative performance of the US economy compared with the more dynamic performances of China, Japan and Europe places the dollar at a severe long-term disadvantage on the foreign exchanges.
