James Pethokoukis

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.

The currencies of the New World should also continue to outperform those of the Old World. While the economies of the Old World are likely to stagnate as a result of the expansion of their social welfare states, the economies of the New World are likely to continue to rapidly improve their standards of living. The proliferation of free trade and globalization should continue to boost prosperity in the emerging economies of Asia, Africa, the Middle East, and Latin America. As discussed below, China is leading this charge and pushing up commodity prices. Australia, Canada, South Korea, and Taiwan are included in my New World paradigm.

It is the last part of this bit from Brad DeLong that really caught my attention (bold is mine):

The fact is that the approporiate fiscal policy for the U.S, right now is to pass: (a) a bigger stimulus over the next two years, (b) a standby tax increase to return the federal budget to primary surplus by 2012, and (c) devout and lengthy prayers that confidence in the dollar doesn’t collapse and send interest rates on U.S. Treasuries above the economy’s growth rate–in which case the situation changes from its current value of “dire” to “catastrophic.”

A weak dollar is not always a bad thing. Stocks are up 43 percent from their March lows while the greenback is off 11 percent against major currencies. Scott Grannis explains the correlation:

As panic set in late last summer, people all over the world flocked to the dollar as a safe haven. People stopped spending money, stockpiling it in the form of currency and in the form of higher money balances. … It all reached a head in early March of this year, as fear of massive deficits and massive tax increases paralyzed financial markets. Since that time, everything has reversed. The economy avoided the catastrophe many had feared, and Obama’s legislative agenda has stalled and his approval ratings have plunged. People have stopped accumulating dollar currency and money deposits, and so spending is starting to ramp up. The economy is starting to come back to life.

But economist David Rosenberg of Gluskin Sheff has begun to worry (this is the second time he has written about it this month) that a weaker dollar is starting to reflect a plan by the White House to send it lower to give the economy a short-term boost, as well as the political fortunes the Obamacrats:

[US Dollar Index futures are] starting to break down, and the moving averages are moving down across the board. Meanwhile, the commodity complex and the commodity-based currencies are on fire. The Kiwi is at a nine-month high; the Rand at an 11-month high and the Loonie at a seven-week high. Meanwhile we saw sugar, wheat, corn, cotton and gold all rally significantly yesterday. As we said before, the last policy shoe to drop, which may be dropping already, is the dollar.