1 post tagged “information arbitrage”
yesterday (june 4th), fed chairman ben bernanke finally made a pitch for a stronger dollar. while we have been enjoying a bull market for a number of years, the dollar has lost considerable value since 2002 - nearly 40% - as illustrated by the us dollar index chart below:
many folks have touted that a weak dollar doesn't mean a weak market (see the bull market run from end of '02 until now) and that a weak dollar means our exports are more affordable to the rest of the world. both these points are true, but both are short sighted. there are number of negative impacts of a weak dollar.
roger ehrenberg does a great job in summarizing (3 bullets below) why a weak dollar is bad on his blog information arbitrage:
- The U.S. is a debtor nation. We rely on foreign governments to finance our deficits. If the value of those dollar-denominated holdings keep falling, at some point they will either stop buying or demand an increasingly high interest rate to offset currency losses;
- The U.S. financial system is in a badly weakened state. We need both onshore and offshore sources of capital to bolster bank balance sheets burdened with busted ABS and retained LBO loans. If foreign investors lack confidence in the dollar, this erects an extremely high barrier for investment.
- The U.S. imports a lot of stuff. Paying for this stuff with depreciated dollars means only one thing - rising prices. A weak dollar is fundamentally inflationary and something that could bring us back to a time we'd all rather forget - the 1970s.
can you remember the last time you heard about a country suffering economically because of a strong currency?. me neither.
