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Pragmatic Capitalism

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Dollar Strength

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I just read an article that says that the dollar is up partially because of Trump and anticipated stimulus spending. But isn’t government spending inflationary and should drag the dollar lower and not higher? Thanks

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Posted by bhcohen1
Posted on 01/02/2017 1:58 PM
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That’s not why the USD is rising. The USD is rising because the FX markets believe the US economy will benefit in relative terms. So they dollar gets stronger in accordance with the idea that real growth will be higher relative to other economies. So for instance, the peso crashes against the USD because the FX markets expect goods to become cheaper in Mexico relative to the USA. So yeah, inflation will be higher in the USA, but the USD is rising because real growth is expected to be higher in the USA.

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Cullen Roche Posted by Cullen Roche
Answered on 01/02/2017 2:51 PM
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    There’s an op-ed piece in today’s WSJ outlining concerns about the economic risks of the strong U.S. dollar. It mentions the negative impact on exports as well as the risks related to foreign dollar-denominated debt. The writer also said a strong dollar may prevent the Fed from allowing interest rates to “normalize”. Finally, he suggests that we may need to have another “Plaza Accord”, similar to the 1980’s, with the goal being more stable relative major currency values.

    What are your thoughts, Cullen, on a strong U.S. dollar harming economic growth?

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    Posted by Steve W
    Answered on 01/13/2017 10:20 AM
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      Oh boy, another “Plaza Accord” will result in another stock market crash ala 1987. Idiots behind the wheel, as usual.

      Look, global capital flows to where it is treated best. If you dissuade that from the bully pulpit or executive or legislative action, you just shot yourself in the foot as an economy. Who cares about gigantic mega-corporation conglomerate export troubles??? Zzzz. “Buy America” is small cap domestic firms that benefit from a stronger dollar.

      But yes, the eventual imploding foreign debts all stupidly denominated in USD at low rates will herald the end of the deep water-blue navy-petrodollar=hegemony and world reserve currency. But it’s not going to happen overnight. Give it ten years.

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      Posted by MachineGhost
      Answered on 01/13/2017 6:52 PM
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        BTW, who wrote that op-ed piece? I’m not a subscriber.

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        Posted by MachineGhost
        Answered on 01/13/2017 6:53 PM
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          Is a stronger dollar hurtful to growth? Well, yes, to some degree. It means you’re becoming less competitive vs foreign economies. But that doesn’t mean it’s “bad”. Think of it like being Apple in the phone market. Their relative prices go up which makes competitors more competitive, but Apple is still the highest quality producer of goods in the market. Is it “bad”? Well, yeah, you’d expect competition to eat at Apple’s growth, but that doesn’t mean Apple will necessarily do badly. They might just do less well….

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          Cullen Roche Posted by Cullen Roche
          Answered on 01/15/2017 2:55 PM
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            Apple (and the USA) is the guy that outruns the guy trying to outrun the bear.

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            Posted by MachineGhost
            Answered on 01/15/2017 9:25 PM
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              MachineGhost is right. The days of the USD as the hegemon currency are gone. The fall began with Obama and will be continued under Trump. Obama was the first person to really campaign on the trade deficit (albeit more implicitly) and Trump took this to another degree. Our trade deficit is <3% of GDP, which's something I think's sustainable.

              I do think it's possible for the repatriation that Trump wants to bring from corporations to increase the dollar, but I also think that may be offset with tariffs (which also began under Obama, but this'd be more extensive).

              The US doesn't need Middle East oil anymore either. That'll only accelerate those trends.

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              Posted by Suvy Boyina
              Answered on 01/15/2017 10:43 PM
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                Saudi Arabia isn’t going to go quietly into the night; they have a massive socialist welfare state to support. They’re already in the process of diversifying away from crude oil, including — ironically — into solar generation. Wouldn’t want to be them.

                I found it interesting that Venezuela is the largest member of OPEC by capacity and yet they play a minor tertiary role due to their dysfunctional socialist-authoritarian government. No real credibility or bully pulpit capability.

                It’s not gonna end well for all these heavily oil-dependent countries if they don’t adapt.

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                Posted by MachineGhost
                Answered on 01/16/2017 3:17 PM
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