Mnuchin’s Comment on the Dollar
Regarding Treasury Secretary Mnuchin’s comments about the administration’s weak dollar policy, I want to make sure that you understand what having currency weakness means—most importantly, it is a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities.
More precisely, a weak currency:
- Reduces the currency holder’s buying power in the rest of the world (e.g. dollar weakness reduces Americans’ buying power relative to foreigners’ buying power)
- Devalues the debt denominated in the weakening currency, which hurts the foreign holder of that debt
- Supports prices of assets denominated in that currency (because of the currency weakness), giving the illusion of increasing wealth
- Raises a country’s inflation rate
- Stimulates domestic activity
None of this is what the U.S. economy needs now.
While it’s described as a desirable and intended thing, it might not be a choice. The size of dollar holdings of reserves (in dollar-denominated debt) and the dollar’s role as the dominant world currency are anachronisms and large relative to what one would want to hold to be balanced, so rebalancings should be expected over time, especially when U.S. dollar bonds look unattractive and trade tensions with dollar creditors intensify.
Sales Specialist
6yI think it's all over... our economy is going to collapse and the world currency will change
Attorney and CPA
6yEcon 101 in three paragraphs. Well done. Trump's contra statement of a strong dollar makes infinitely more sense right now.
Supply Chain, Management
6yReducing the $$ value helps exports; however, the competitors could proceed with the same measures. Made in America does not always create jobs in America if everything within the industries remain constant. It sounds contradicting? I agree with you but the statement is true. Let's take it to a different level. When we reduce the currency value and put barriers of trade to stop importing steel from Asia as an example, we protect the steel jobs in the U.S. which is great but only the steel workers would benefit; however, we would impact different sectors in the economy. Here is why, when we stop importing, there is less outflow of the USD in the international currency market, thus the value of the $$ goes up given there are less $$ in the international market (supply&demand). If the $$ value is high then entities/pple that import from the U.S. different goods and services will import less. Why? Because the $$ value is high upon the barrier of trade, which makes it difficult to purchase more goods and service, thus the importers will import less from the U.S. which means exporting less = less jobs, slower economy, etc. It would have been better if we did stick with the gold standard monetary system.
Speaker/Author on "Play The Room", Infinite Banking & “Crap Hits the Fan Consultant”
6yGregory Nguyen