Lately there have been a variety of opinions and articles stating that the decline of the U.S. Dollar is either not something to be (unduly) concerned about, or even that such a falling U.S. Dollar will be beneficial.
The logic behind these opinions is various. One, that is particularly notable, is that the U.S. Dollar has had large declines previous in its history; these declines have occurred with negligible adverse economic consequences. Based upon these previous Dollar declines, it follows that any large decline now will also be free of accompanying economic damage.
This theory, that previous large Dollar declines have not had severe economic ramifications, is largely true; however, I believe, based upon a variety of factors that these previous episodes are not representative of our current economic situation.
One of the reasons I believe that this U.S. currency decline is not being taken as seriously as it should is that the U.S., unlike other countries, has never experienced a severe decline in its currency that brought on severe adverse economic consequences.
While of course such accompanying adverse economic consequences is contingent upon many factors, including the extent of the currency’s decline, on an “all things considered” basis I believe there are many reasons to be very concerned about further substantial U.S. Dollar weakness.
Of particular concern is U.S. policy toward the U.S. Dollar, as stated by Treasury Secretary Geithner and Ben Bernanke. The “official policy” is one supportive of a “strong Dollar.” However, policy actions seem to contradict the “strong Dollar” statements.
During his April 27 Press Conference, Ben Bernanke made comments about the U.S. Dollar. I found his reasoning rather myopic in nature, and his conclusions incorrect. Perhaps most disconcerting was his answer to the question about the potentially problematical impacts of a weak Dollar:
“…I don’t think I really want to address a hypothetical which I really don’t anticipate.”
While a severe drop in the U.S. Dollar can hopefully somehow be avoided, I fear that this probability is low. As such, I have written extensively about the vulnerability of the U.S. Dollar to a substantial decline and the adverse economic consequences that would accompany such.
We, as a nation, are already seeing the negative manifestations of a weak Dollar, many of which are causing complex problems. Further adverse impacts from a weak currency are bound to be just as insidious, if not more so.
I think Keynes, from his book Economic Consequences of the Peace, perhaps best spoke of the ill-effects of currency debasement:
“Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1356.62 as this post is written
The U.S. Dollar Index is at 72.78 as this post is written