From a small northwestern observatory…

Finance and economics generally focused on real estate

Strong vs weak dollar

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Ahem…. this may or may not be the truth, but in the words of my fellow Low-Country South Carolina expat, Stephen Colbert, it’s certainly “truthy”.  Reportedly, according to Huffington Post, The Donald called his national security advisor, Flynn, at 3am, to ask whether a strong dollar or a weak dollar was good for the economy.  Reportedly, Flynn told The Donald to ask an economist.  Since then, economists of all stripes have offered advice, because, well, this is important stuff for a President to know, along with “war is bad” and “full employment is good” and stuff like that.

So, here we go.  I’ll take a stab at it.  Whenever the world roils, investors of all stripes look for stable currencies in which to invest, and the dollar is the “mother of all stable currencies”.  Until Brexit, the same could be said of the Euro and the Pound.  Now, not so much.  Anyway, paradoxically, the election of The Donald roiled the world’s zeitgeist, causing investors to seek the dollar, and thus strengthening our currency.  Now, what’s the impact?  Well, a strong dollar makes it tough to export stuff, but it makes it easy to import stuff.  That wrecks the trade imbalance, and costs jobs in exportive industries.  Conversely, a weak dollar suggests lack of faith in the American economy, but helps with American jobs, albeit makes American consumption more expensive.

ALSO, a strong dollar makes it easy to borrow.  As America runs deficits (both fiscal and trade), we have to borrow and much of this borrowing occurs in foreign markets.  Conversely, a weak dollar drives up the cost of borrowing.

In short, if The Donald wants to bring American jobs home, he’ll opt for a weak dollar, but that will inevitably drive up the cost of consumption as well as the cost of borrowing.  Ironically, the way to achieve a weak (or lets say, “less strong”) dollar is to achieve some sort of stability in the world, and that doesn’t seem to be in the offing.

Written by johnkilpatrick

February 10, 2017 at 11:12 am

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