They’re calling The Oughts a Lost Decade. Yet how could that possibly be? The experts keep telling me a weak dollar brings prosperity. But look at this chart from Carpe Diem:
Ed Yardeni expounds:
I’m not sure, but it seems to me that the dollar is the best of a dodgy breed. The Old World nations–Europe, Japan, and the United States–have rapidly aging populations. Their outlays on social welfare are rising faster than their GDPs. Their dependency ratios–the number of retired persons supported by each worker–are taking off. This suggests to me that the dollar, the euro, the pound, and the yen (DEPY) might all continue to be good shorts relative to gold. (See Figure 5 in our Gold chart book linked below.) Gold is widely viewed as a hedge against inflation. More broadly, it is a hedge against out-of-control debt-financed government spending.
I spent all morning at a Senate Budget Committee hearing looking at how to create a special commission that would devise a plan to fix America’s long-term budget shortfall. This would be like the base-closing commission where a panel — made up mostly of senators and congressman — would submit a plan to Congress that would have to be voted on — up or down, no amendments.
If the Reserve Bank of India’s directors had any doubts about the wisdom of buying 200 tonnes of IMF gold — and likely dumping some U.S. Treasuries in the process — they had only to watch last weekend’s legislative activities on Capitol Hill. The proceedings provided plenty of reassurance that the move was a smart play.
The great Andy Busch of BMO Capital Markets sees some problems down the road:
It’s called carry, but not like currency carry. As most know, banks can fund themselves at 0.1%-0.25% as the Federal Reserve keeps Fed Funds at 0.0%-0.25%. Then banks are incentivized to find the safest, highest return they can with this cash.
Allan Meltzer on deficits and the dollar:
The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That’s clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?
This paper make a great case for blaming the Great Recession on the massive influx of cheap labor (and the continued weak yuan) into the global economy. Bad decisions on Wall Street didn’t help, but they are not the root cause:
The great Andy Busch of BMO Capital Markets effortlessly explains the link between the current anemic state of the dollar and America’s terrible fiscal situation: