Dollar Myths

I found an interesting article written by Alex Merk, Manager of the Merk Hard Currency Fund. He lists what he believes to be are dollar myths. Here’s an example:

"The dollar is safe because the U.S. has ample assets

Some say the current account deficit that requires foreigners to arrange for over $3 billion of capital inflows every business day just to keep the dollar from falling does not matter. These pundits say a deficit of 6.5% of Gross Domestic Product (GDP) is sustainable because the deficit is only about 1% of all private assets held in the U.S.; as a result, deficits could be carried a long, long time.

This argument is one about the dollar going to zero, an extreme case of the dollar losing relative to other currencies. However, the current account deficit and its affect on the dollar is about cash flow: by putting it in the context of a GDP is reasonable, as GDP is a cash flow measure of production. Comparing it to private savings is mixing apples with oranges."

Here’s a list of Merk’s other dollar myths:

  • The dollar is doomed because of our large budget deficit
  • A lower dollar will cure the trade deficit
  • A lower trade deficit will save the dollar
  • A weak economy causes a currency to falter
  • China is the problem
  • Higher interest rates help the dollar

Read his full analysis to learn the reasons why they’re all myths.

12 comments

  1. BogusRogus

    I can’t give this much credence as he owns a fund that “profits from the fall of the dollar” – how novel…

    He may be right or he may be wrong, but we’ll never know as he has a vested interest in pushing a low dollar case.

    Reply
  2. BogusRogus

    I can’t give this much credence as he owns a fund that “profits from the fall of the dollar” – how novel…

    He may be right or he may be wrong, but we’ll never know as he has a vested interest in pushing a low dollar case.

    Reply
  3. TampaLuke

    Poorly written. He may know currencies but his ability to convey a clear and, more importantly, concise message is lacking. It leads me to believe that Bogus’s comment may be very correct.

    Reply
  4. TampaLuke

    Poorly written. He may know currencies but his ability to convey a clear and, more importantly, concise message is lacking. It leads me to believe that Bogus’s comment may be very correct.

    Reply
  5. stucros

    Thanks Forex Gump some interesting points even if it is a bit of a marketing ploy. Studying Economics at Uni the twin deficit and Asias apparent desire to fund it has always causes me to ponder. Recently I came across the idea (not mine!) that the deficits are developing the economies such as China (hardly debateable or new in it’s self) but in doing so America is creating a mass population of middle class consumers in Asia which will buy Americas goods. OK so the guy is right that the US will never export sneakers to China but they will be exporting all the less intangible aspects of those sneaker such as the design, brand, advertising etc and when a good portion of 1.2bio population are in the market to buy sneakers that’s a lot of cash!!!!! Something we can already see if the European designers selling lots of handbags to the new middle classes although typically they are also made in Europe.
    I’m dollar bearish too but you can’t help think the future is not quite as bleak as it may seem!!!!

    Reply
  6. stucros

    Thanks Forex Gump some interesting points even if it is a bit of a marketing ploy. Studying Economics at Uni the twin deficit and Asias apparent desire to fund it has always causes me to ponder. Recently I came across the idea (not mine!) that the deficits are developing the economies such as China (hardly debateable or new in it’s self) but in doing so America is creating a mass population of middle class consumers in Asia which will buy Americas goods. OK so the guy is right that the US will never export sneakers to China but they will be exporting all the less intangible aspects of those sneaker such as the design, brand, advertising etc and when a good portion of 1.2bio population are in the market to buy sneakers that’s a lot of cash!!!!! Something we can already see if the European designers selling lots of handbags to the new middle classes although typically they are also made in Europe.
    I’m dollar bearish too but you can’t help think the future is not quite as bleak as it may seem!!!!

    Reply
  7. OutwittingYouGlobally

    “TampaLuke”, I kind of agree with you that it now written with a hasty pen. Even though not necessarily poorly written, it definitely wasn’t in-depth enough to make a convincing case to a layman or a macroeconomics beginner.

    I disagree with you “stucros”. You are missing the point here. The Chinese middle class itself is bigger than the entire U.S. population. When discussing China, we are talking about a total of 1.4 billion people who DO NOT NEED Americans to create marketing strategies, brands and designs or whatever else you’re imagining U.S. will provide (and fooling yourself in doing so). Chinese will even design their own cellphone standard just to get rid of dependency on the U.S. (and of course due to their own patriotic ego which is boosted by the fact that they have the best position to become a global superpower in anything they want, if they put their mind into it).

    There is absolutely nothing that U.S. has to offer to China. U.S.’s biggest advantage was its capital and secondly its innovation platform. This was historically why U.S. controlled capital was invested and became the source of American prosperity.

    However, over the last few years, the Fed has been trying to fuel consumer spending the wrong way, by lowering interest rates. Combined with lower taxes, this helped push consumer spending up but not by introducing real growth but rather by credit expansion. And both corporates as well as individuals have been very undisciplined and didn’t really care about saving but rather consumed.

    Increased consumption brought up prices, fueling what appears to be a boom (including rise in real estate prices). However, with the interest rates being low, extraction of this inflated imaginary equity from homes has become a commonplace technique in the U.S. by consumers to fund further spending. No fiscal discipline whatsover, consumers in the U.S. now have lowest savings ever.

    And the government? Its savings are non-existent. Government hasn’t been trying to cut their spending, so this way, it behaved fiscally irresponsibly as well.

    If you look at other important indicators, you’ll see a very fragile picture – reserves are around 60 billion, even Indonesia has more reserves than that!

    Back on the consumer front, the recent sub-prime meltdown (which is just the beginning) is a tangible message to the world and if you don’t see it, you’re blind: USA is a country ridden with debt; both on the budgetary/deficit level as well as on the consumer level.

    And the government continues to issue debt incessantly (the unfortunate thing is that it simply has to – it needs the money to finance its own spending deficit). While doing that, it has recently reached the tipping point where its interest expenses on the debt which it issued exceeds the interest it earns on the investments from outside. Now that’s scary!!

    China is now slowly dumping the U.S. dollar as it tries to diversify its hundreds of billions of dollars worth of reserves. It doesn’t trumpet it too loudly, you’ll see expressions such as “diversifying reserves” used – but everyone knows what it means. They are dumping the dollar, buy something else.

    Sure, it makes the U.S. debt cheaper but it surely isn’t helping the U.S. economy a whole lot – it’s stuck with indebted consumers with little to no savings.

    Alex Merk in his article has given you the best advice in forex trading. Don’t fooling yourself that you can outwit the 2 trillion per day market. The market doesn’t care about you with your couple thousand dollars.

    Dump the dollar, sit back, relax and watch the next few years. And remember, the market is always right!

    Reply
  8. OutwittingYouGlobally

    “TampaLuke”, I kind of agree with you that it now written with a hasty pen. Even though not necessarily poorly written, it definitely wasn’t in-depth enough to make a convincing case to a layman or a macroeconomics beginner.

    I disagree with you “stucros”. You are missing the point here. The Chinese middle class itself is bigger than the entire U.S. population. When discussing China, we are talking about a total of 1.4 billion people who DO NOT NEED Americans to create marketing strategies, brands and designs or whatever else you’re imagining U.S. will provide (and fooling yourself in doing so). Chinese will even design their own cellphone standard just to get rid of dependency on the U.S. (and of course due to their own patriotic ego which is boosted by the fact that they have the best position to become a global superpower in anything they want, if they put their mind into it).

    There is absolutely nothing that U.S. has to offer to China. U.S.’s biggest advantage was its capital and secondly its innovation platform. This was historically why U.S. controlled capital was invested and became the source of American prosperity.

    However, over the last few years, the Fed has been trying to fuel consumer spending the wrong way, by lowering interest rates. Combined with lower taxes, this helped push consumer spending up but not by introducing real growth but rather by credit expansion. And both corporates as well as individuals have been very undisciplined and didn’t really care about saving but rather consumed.

    Increased consumption brought up prices, fueling what appears to be a boom (including rise in real estate prices). However, with the interest rates being low, extraction of this inflated imaginary equity from homes has become a commonplace technique in the U.S. by consumers to fund further spending. No fiscal discipline whatsover, consumers in the U.S. now have lowest savings ever.

    And the government? Its savings are non-existent. Government hasn’t been trying to cut their spending, so this way, it behaved fiscally irresponsibly as well.

    If you look at other important indicators, you’ll see a very fragile picture – reserves are around 60 billion, even Indonesia has more reserves than that!

    Back on the consumer front, the recent sub-prime meltdown (which is just the beginning) is a tangible message to the world and if you don’t see it, you’re blind: USA is a country ridden with debt; both on the budgetary/deficit level as well as on the consumer level.

    And the government continues to issue debt incessantly (the unfortunate thing is that it simply has to – it needs the money to finance its own spending deficit). While doing that, it has recently reached the tipping point where its interest expenses on the debt which it issued exceeds the interest it earns on the investments from outside. Now that’s scary!!

    China is now slowly dumping the U.S. dollar as it tries to diversify its hundreds of billions of dollars worth of reserves. It doesn’t trumpet it too loudly, you’ll see expressions such as “diversifying reserves” used – but everyone knows what it means. They are dumping the dollar, buy something else.

    Sure, it makes the U.S. debt cheaper but it surely isn’t helping the U.S. economy a whole lot – it’s stuck with indebted consumers with little to no savings.

    Alex Merk in his article has given you the best advice in forex trading. Don’t fooling yourself that you can outwit the 2 trillion per day market. The market doesn’t care about you with your couple thousand dollars.

    Dump the dollar, sit back, relax and watch the next few years. And remember, the market is always right!

    Reply
  9. ling

    very well said “OutwittingYouGlobally”.

    even thou the Fed has it rates cut, but china growth and the “independency” from US economy really hits US bad.

    Good 4 sharing this article. –> Merk is right in a way to foresee the USD

    Reply
  10. ling

    very well said “OutwittingYouGlobally”.

    even thou the Fed has it rates cut, but china growth and the “independency” from US economy really hits US bad.

    Good 4 sharing this article. –> Merk is right in a way to foresee the USD

    Reply
  11. rickey

    China is now slowly dumping the U.S. dollar as it tries to diversify its hundreds of billions of dollars worth of reserves. It doesn’t trumpet it too loudly, you’ll see expressions such as “diversifying reserves” used – but everyone knows what it means. They are dumping the dollar, buy something else.
    Make Money in Minutes

    Reply
  12. rickey

    China is now slowly dumping the U.S. dollar as it tries to diversify its hundreds of billions of dollars worth of reserves. It doesn’t trumpet it too loudly, you’ll see expressions such as “diversifying reserves” used – but everyone knows what it means. They are dumping the dollar, buy something else.
    Make Money in Minutes

    Reply

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