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Strategies & Market Trends : Value Investing
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To: E_K_S who wrote (45525)11/17/2011 12:15:10 AM
From: Spekulatius  Read Replies (3) of 78476
 
I think you are on the wrong track looking for a stronger US$. For one thing, there is no direct correlation between the federal deficit and the exchange rate. Exchange rates are driven by money streams from investments (driven by interest rate differentials or opportunity for investments) and trade balances.
Looks for example to Japan - the Yen is at an historic high against the US$ and Euro but the Japanese federal deficit is extremely high. The latter does not matter because it is financed internally and the strong export surplus creates a steady stream for forex reserves that keeps the yen high. What makes you think that the US$ will grow stronger if the federal deficit is reduced.

There are secondary effects - the federal deficit is 8.5-9% of GNP in the US$, representing excess spending that will be evaporate if the deficit is cut to zero - take this spending away all of a sudden and you have the mother of all recessions. This of course would reduce imports and reduce the trade deficit for the US somewhat strengthen the US$. However my moniker states already that Mr. Bubbles will pull all levers available and then some to make sure that this does not happen. in any case if this were to happen, all the stocks that you are looking at are going to be much much cheaper.

Sadly enough, I think that exactly this is going to happen, except in slow dribbles rather than in one big chunk. This means that we are going to have a 1% negative GNP growth headwind for roughly a decade and possibly more if you believe in multiplier effects as Keynes did. This is the semi optimistic view - the pessimistic view is that the bond vigilantes will go to the US after they are done with Italy and we get a heavy dose of austerity with all the nasty side effects will be forced upon us in a hurry.

There is an optimistic scenario too - that Mr. Bubbles can play tricks with the Fed balance sheet forever and we can print our way into prosperity after all we own the printing press for the worlds reserve currency!
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