Central Banks might be leading us to lower standards of living


This week I am looking to see how the quarter ends and how quarterly earnings begin – as you know, I am not expecting good things, we’ll see if expectations are managed. Here’s a few of the past week’s more important or just interesting articles in the free or almost free media – if you aren’t at least registered for the Financial Times, do it. Some of the articles are nicely contradictory to show just how confused markets are right now:

I’ll be back to finish after lunch…

Ok, I came back after lunch a day late. Sorry. The world never stops moving.

While I know that many in the media are bought and paid for, or just not very smart or lacking in empathy for other Americans, their complete misrepresentation of the strong dollar continues to astound me.

What really has me concerned is that Janet Yellen might not understand the impact of a stronger dollar either. Let me make this short: a strong dollar is good. It’s good for Americans standard of living and it’s even good for business. Yes, it might lead to a repricing of global assets, but better sooner than later. Later is much more dangerous.

Those who tout a strong dollar as bad for business and the economy are flat out wrong. They complain that a stronger dollar depresses growth in America. While that might be fractionally true, a stronger dollar also makes standard of living higher for virtually everybody who isn’t wealthy, that is, about 99% of America.

Let’s consider this. Only about 15% of American GDP comes from exports. Among those exports only a portion are significantly price elastic – appreciably lower demand at higher prices. So, should we manipulate the dollar lower to help a minority of the population at the expense of others? I hope not.

One example of a good that isn’t price sensitive is the natural gas we will begin exporting in the 4th quarter and increasing those exports in coming years. People need that natural gas and even with a strong dollar it is often half the price of getting it from elsewhere. They are going to buy our natural gas, and distillates, regardless of whether the dollar appreciates another 20% the next several years.

Others goods and services that are not very sensitive to a stronger dollar include high-end manufactured goods and machinery, high-end electronics and technology, medical goods, pharmaceuticals, certain consulting and food. 

Yes, there are some industries hurt a bit by a stronger dollar, but a recent estimate shows that the stronger dollar impacts GDP by 6/10 of 1%. I would suggest that it is easy to demonstrate at least a corrosponding improvement in standard of living as people can spend more (consumer spending has been higher) and pay down debt (that still needs to be done).

A few years ago on MarketWatch I talked about how a rising dollar would manifest and the benefits. I specifically talked about the eventuality that the U.S. is a natural gas exporter and essentially ends most OPEC oil imports. We are at that doorstep. With a stronger dollar that could result in hundreds of billions of dollars per year of improvement to the U.S. economy. How’s that for stimulus and improving lives?

Ms. Yellen, raise interest rates, get us off the zero bound and let America’s new future take hold. If there is a correction, so be it. There’s about six trillion in U.S. dollars waiting to go somewhere. Tomorrow’s international growth assets at a discount to today’s ridiculous valuations would be a great place for those strong dollars.