Hey all, I've been meaning to make this post for a while however, I've been quite busy with school.
If anyone follows econometrics, you will know the USD is projected to depreciate by approx. 20% by the end of 2021, let's discuss the implications of this and why I am now (more than ever) bullish on both the US economy and the stock market. Let's take it way back to high school economics (One of the only Keynesian concerts I do agree with)
As currency depreciates...: - domestic goods become more attractive in an international market because they're cheaper in relative terms (exports increase) - inflation rate increase - demand for the dollar increases - greater FDI inflows --> decrease in budgetary deficit --> decrease in international debt (if Biden is smart) ------- Overall, depreciation stimulates economic growth
Now, there are *definitely* caveats to this, it's not all unicorns and rainbows, the most notable is the price of imports will rise. Given America's dependence on imports (from let's say China, Japan, & Germany) the price of goods will increase in both relative and absolute terms; so yes inflation :0.....
Why am I bullish on this??!!??!!
Well, coming out of a recession, from an economic standpoint America is still in one (IMO), currency depreciation is the most powerful tool the Fed can use at this time period. I believe with a devalued currency the US can simultaneously do the following:
- Decrease the BoP - Slowly (emphasis on slowly) increase interest rates which will.... -> Attract more more FDI which will... -> Help companies grow which will.... support your "OvErVaLuEd" stock market - Increase minimum wages (this is wishful thinking)
Overall: Economic growth + growth of real asset value = robust American recovery lasting 10+ years
Note: I believe interest rates don't need to be raised, the return% from real & financial assets is enough to attract foreign investment (P.S it already has been)
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While currency depreciation certainly could help with exports in the long term, there are a couple of obstacles in the short run. The first is the $12 trillion in Ex-US global debt that that’s denominated in dollars. Debtors will still need to convert their local currency to dollars to service these debts. The next issue is funding the $3 trillion US budget deficit. The US federal government needs to issue long-term treasury bills to make up for the short fall between what it brings in taxes and what spends. Depreciating the dollar will make selling treasury bonds harder. The third issue is that a lot of leveraged trades in the repo market are collateralized with Treasury bonds. So rapidly depreciating the dollar would compromise how much funds could borrow to buy stocks, which would have the effect of lowering US stock prices. The fourth issue is USD is the only real reserve currency that is practical to hold. The euro looks compromised more and more as Brexit drags on and coronavirus continues to drain the public finances of the European nations. There’s gold, but not enough of it to use as a currency. The Chinese renminbi is about 2% of reserves at Central Banks, and China is not the most trustworthy source of reporting financial data. So, the US dollar as hated as it is is still necessary to hold as a reserve currency.
RaftoO
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@unicow, I absolutely agree with you on very point and I actually forgot to mention the affects on the debt markets all together, thanks for bringing that up. I'm thinking Carter-era fiscal responsibility, I'd like to see Biden pay of the budgetary deficit via frugal spending choices rather than raising capital. A lot of congress spending I don't agree with. Yet again tho, this is all just wishful thinking, this was more of a decade-long plan than an in depth analysis, I believe the markets will have to take a hit for the longevity of the economy