The United States dollar might be the catalyst that sets off the next world economic crisis and ends Donald J. Trump’s meteoric political career.
The greenback has been rising to new highs lately; its value is 40% higher than in 2011, and dragging down other currencies in, The Economist noted. Some Asian money has fallen to lows not seen since the financial crisis of 1997-1998 nearly 20 years ago. The yuan has fallen to its lowest level against the dollar since the 2008 economic meltdown.
This raises the specter of inflation and casts serious doubt on the possibility of any sort of recovery in the United States. Interest rates in the United States are already rising and beginning to threaten future growth.
Will the Strong Dollar Burst America’s Real Estate Bubble
The yield on the US 10-year Treasury bond rose from 1.7% right after the November 8, 2016, election to 2.3% on December 3. The average rate on a 30-year fixed mortgage in the United States rose two points between November 25 and December 3, 2016, going from 3.51% to 4.04%, Bankrate reported.
Rising interest rates discourage housing construction which would be vital to any economic recovery in the United States. They also threaten the US real estate market which has been booming, lately. Some cities like Seattle and San Francisco are even in the midst of housing bubbles. If interest rates keep rising the bubbles will burst with potentially catastrophic results.
The effect of a bursting real estate bubble is to be feared, after all it was the crash of the US housing market that triggered the crisis of 2008. Another real estate bubble to be afraid of is that in Australia, which might actually be worse than the one in the United States. A strong dollar might pop the Australian bubble by raising interest rates.
Will the Strong Dollar Throttle America’s Economic Recovery and Trump’s Presidency?
A strong dollar is a major threat to America’s half-hearted economic recovery because it will make US exports less competitive in the world market. The US is heavily dependent on exports of certain items including aircraft, vehicles, heavy equipment, machinery, farm machinery, weapons, munitions, machine tools and electronics.
A rising dollar might give competitors like China, Japan, Germany and the United Kingdom an edge in some of those sectors. Expensive dollars will raise production costs in the US while driving them down in other nations. This can lead to a downturn in US industry and harm the industrial heartland in the Midwest.
That potentially threatens Mr. Trump because much of his base is in the US industrial heartland or Rust Belt. One of Trump’s major promises was to create more industrial jobs, if that doesn’t occur, both Donald and his Republican Party will suffer at the ballot box.
Trump would be in real trouble if the dollar keeps rising for the next two years generating inflation and costing industrial jobs. US midterm Congressional elections are coming in less than two years (in 2018). The Republicans have a slim majority in the US Senate and are on shaky ground in the House of Representatives. The opposition Democrats would only need to pick up a handful of seats to get a majority, which would lead to gridlock and divided government.
How the Strong Dollar Threatens the Trump Agenda
Another problem Trump faces is fossil fuels, he’s promised to increase exports of coal and oil. US oil, natural gas and coal would be less competitive with a strong dollar and higher prices; particularly with countries like Iran, Venezuela and Russia dumping oil on the market just to pay the bills.
Also threatened are US agricultural exports which would face competitors like Argentina with lower production costs with a strong dollar. An interesting problem a strong dollar creates is that imports; particularly in agriculture, enjoy a competitive advantage over domestic products.
That situation might increase calls for protectionist measures such as the tariffs Trump has proposed. Protectionism lowers consumer spending and increases inflation by raising prices and makes the situation worse.
Higher interest rates can dampen economic growth by drawing money out of equities or real estate and into bonds. This creates a self-destructive cycle that drives more unemployment. Less investment in industry and construction means fewer jobs and factory orders and lower production.
A related problem the United States will face is lower foreign investment as money heads overseas to markets like China in search of bargains. That too means less economic activity and slower job growth.
A Strong Dollar Depression
The worst case scenario from a strong dollar would be a total collapse of international trade like that in the early 1930s. That would occur because countries would not be able to afford to do business with the United States.
Some of the results of the Depression included farmers dumping crops on the ground because they could not sell them. Meanwhile workers were standing in breadlines because factories had closed and there were no jobs. One reason for that was export markets had simply evaporated.
Such a scenario is unlikely today but a major economic downturn is likely particularly in China. The political effects of a strong-dollar economic downturn are unclear but they’re likely to be nasty. One obvious casualty of that downturn would to be Donald J. Trump because voters will need a scapegoat and Trump will make a great scapegoat.
We must all fear the strong dollar because it might be the greatest threat to global economic recovery right now. The havoc it can wreak is vast and there might little or nothing that the world’s central banks will be able to do to deflate it.