Might the Dollar Be Approaching a Near-Term Tipping Point?
May 13, 2020
The last half century has seen six very broad waves representing three multi-year depreciations alternating with three multi-year appreciations. These six partitions have been relatively similar in duration and, in some instances, magnitude. 1970 represented the last stage of a post-WW2 period of fixed parities anchored by America’s willingness to exchange gold for dollars at a fixed price. This system was unraveling under the weight of strains in the U.S. fiscal and trade balances as well as accelerating internal price inflation. In mid-August 1971, President Nixon ended promised dollar-gold convertibility, imposed internal wage and price controls, and allowed the dollar to float lower according to the whims of market supply and demand until an agreement was arranged in December that formally devalued America’s currency by 8.5% and reestablished fixed parity rates against other currencies.
That remedy didn’t stop the increasingly one-side nature of pressure on the dollar, and the new parities were maintained for only 14 months. A second dollar devaluation, this time of 10%, was done in mid-February 1973, but it too did not restore sustainable market conditions. A new international monetary system of flexible, market-determined dollar exchange rates with other major currencies was introduced in March 1973. In fits and starts, the dollar continued to trend lower on balance until end-October 1978, ending the first long-term dollar downswing, which amounted to roughly 25% on a trade-weighted basis against other major currencies and took about eight years to fully unfold.
The first of the three broad dollar upswings lasted six and a half years and amounted to 62% through late-February 1985. That was followed by a 44% decline over the next ten years, reaching bottom in April 1995. From then until February 2002, a span of roughly 7 years, the dollar rose 49%, propelled by U.S. growth of around 4% over several years and, in the late stages, by an initially skeptical reception of the euro, which had been launched at the beginning of 1999. Fast forward some 9 years to May 2011, and the trade-weighed dollar was down again, this time by 43%, and the third and still-evolving third big dollar upswing has seen a rise of 44% over the latest nine-year period. Coincidentally, the dollar’s current trade-weighted value against other major currencies is only marginally lower than the level in 1973 when it was floated. It’s been a long an winding road.
Given the similarity of duration and magnitude of the dollar’s current big move to earlier broad swings and a sense of a new chapter beginning in geopolitics and the world economy, it’s not unreasonable to wonder if the dollar might be approaching a new tipping point. A downturn seems unlikely in the very near term because the dollar is the predominant go-to paper currency in times of risk aversion, and it’s difficult to find a greater spreader of risk aversion during the last half-century than the Covid-19 pandemic and groundswell of nationalism in many countries that was already happening before 2020. The dollar high in the current upswing occurred just a month and a half ago. The pandemic still has momentum, so rounds of risk aversion-related dollar demand can be expected to persist in the period just ahead.
How the dollar behaves in the ensuing stage will be influenced heavily by how America emerges from this challenge, and here most signs do not look favorable. In spite of President Trump’s claims, the U.S. has not handled the pandemic well. One need look no farther than exhibit A, which is that with only 4.3% of the world population, the United States accounts for a third of all reported cases and 28% of identified Covid-related deaths.
The underlying theology of Trumpism, which is currently indistinguishable from Republican dogma, is that the public sector is terribly inept in whatever it tries to do. Except in matters of war and police protection, the public sector should stay out of the way and let the private sector handle things. The real truth is that there are many things for which the private sector is better equipped for allocating resources and determining the distribution of product and services, but there are also many other activities for which the private sector is pretty clueless. In those instances when private enterprise is permitted to be the major player, decisions are made that impair the public welfare and fail horribly to provide for the people’s common defense. A world pandemic and recession is one example.
The roughly 1000-point decline in the DJIA over the last two days is a sign that the financial community believes President Trump is going to screw up the handling of the reopening of America’s economy. He has cast away people with professional expertise from all parts of the federal bureaucracy, essentially hollowing out the government and leaving it ill-prepared to manage a crisis like the present one. He has weakened Obamacare and taken no alternative step to transition America away from a system dependent on employer-funding. This unique aspect of U.S. healthcare is an historical quirk, created around World War 2 when companies weren’t allowed to raise prices or wages and so managed to compete instead by offering fringe benefits like health care insurance. It served a purpose then but saddled the country with a healthcare program resulting in shorter life expectancy now and far more comparative costs than experienced in most other industrialized economies. These problems have been known for a long time, but the pandemic has revealed a third catastrophic shortcoming of employer-funded healthcare in that such presents an enormous impediment to preserving public health during a pandemic that requires social distancing.
On top of the lack of long-term preparation for this emergency and not using critical months to secure PPE gear and a system of targeted infection tracing, America even now is devoting way too much time and energy to finding another entity to blame for its internal inadequacies. Who cares? Suffice it to say, a challenge to open the economy in a way that prevents a second big wave of deaths and illness should command 110% attention. The global Covid-19 death total to date is still less than 6% of the final number in the Spanish flu epidemic of 1918-19. There’s still time to avert a disaster of much greater degree, but the federal government has got to take the lead. Quit casting blame, and solve the real mess. Fanning a cold civil war in the United States isn’t the way, and doing that is not going to inspire the confidence of world investors that a dollar-centric international monetary system will be sustained.
There is a misguided tendency to pin America’s political mismanagement on one person or one political party. Fascism took root in the 1930s because voters were entranced by the sirens of racism and nationalism. In a country built on slave ownership and the European genocide of the indigenous peoples in North America, it’s not unreasonable to imagine the same mistakes and ultimate stigma happening in the United States. And if that does in fact occur, the dollar isn’t going to keep its top dog place among the currencies of the world.
Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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