The time is fast approaching when President Donald Trump will ask the Federal Reserve to devalue the dollar. Hints and statements regarding the dollar being overvalued have been tossed around a few times since the new administration took office. The foreshadowing which is taking place will lead to the eventual implementation of a lower dollar policy.
The benefits of such a policy will be broad and will complement both domestic and international mandates which are developing.
Domestically a lower dollar will improve American exports as US made goods become more affordable to other nations which wish to import them. This means more manufacturing in country and more jobs to meet those growing demands. Companies which once moved overseas will look at coming back and setting up shop.
Another added benefit would be the increase in GDP which will lower the debt-to-GDP ratio. This is important because under the current system of money creation debt management is the name of the game. At the end of WW2 America had a debt-to-GDP ratio of 140% which is still far from where it is today. Increasing GDP now will lower this ratio and make debt management more functional.
Debt management will be important as the US moves towards another debt ceiling limit and inevitable debate in Congress regarding this limit. It will also be an important part of any dollar devaluation as such an approach to exchange rate adjustments will have to be coordinated with those nations holding large amounts of US denominated debt.
This brings us to the international aspects of dollar devaluation.
There is growing concern in emerging nations such as China that escalating interest rate increases by the Federal Reserve will place additional downward pressure on their currencies. The changes in capital flow which will occur under such a situation could lead to another Asian currency crisis.
The establishment of the BRICS Contingent Reserve Arrangement was targeted at reducing this risk and having a non-dollar source of liquidity in the event it happened.
We can also expect that the recent announcement that China is opening up its $9 trillion bond market to foreign investors could be a signal that Trump is in fact about to ask the Fed to devalue the dollar.
This move, coordinated with interest rate increases, would allow for a soft-shift and re-balancing as investors and capital flow eastward into China for better returns on an appreciating renminbi, while still feeling somewhat secure in dollar based assets because of an improving interest rate environment.
The devaluation of the dollar is coming and nothing will change that. The coordination required will be strategic and will involve multiple nations. The dollar will not die and will not collapse. There will be a marginal loss of faith and confidence in the dollar which will be blamed on Trump and his erratic policies. This will offset the loss of confidence because it will not be considered systemic but political.
Asset diversification will take hold at this point as existing wealth begins to shift. New wealth will be created in America as more jobs are added each month and overall economic health improves.
The logic and economic strategy behind these moves are sound. There are those who thought that QE could never end. There are those who thought that interest rates could never increase again. There are those who think the debt is unmanageable. There will always be those who state something is impossible.
Each step of the way we will continue to discuss the truths, realities, and possibilities here on POM. So far we have been spot on with everything from BRICS, IMF reforms, China and the SDR, and the use of the Trump agenda to facilitate the monetary transformation in America.
As the saying goes, most people will stumble over the truth and continue on walking as if nothing happened. Some stumble into POM and stay to become a part of this growing community of intelligent and thinking individuals.
Every time something happens other commentators and analysts have to adjust their conclusions and thesis. Here on POM we just keep chucking along with the same thesis we have been discussing since day one. Let’s see if we are right once again when it comes to Trump and dollar devaluation. – JC
JC Collins can be contacted at firstname.lastname@example.org
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