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The US Dollar Elevator is Going Up!

by: Jack Miller August 03, 2008    
Jack Miller

Jack Miller

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Since 1995, the "US Dollar Elevator" has been from the ground floor to the top floor and all the way back to the sub-basement. In March of 1995, the US Dollar Index hit and extreme low of 81.69. In January of 2002, the US Dollar index hit 120.24.
On April 22, 2008, the US Dollar Index hit an all time low of 71.32, a 41% decrease from the prior peak.

Since April of 2008, the US Dollar Index has been working its way through a bottoming process. The Index is around 73.3 today.

The next big move is all the way back to the 120 level.

US EXPORTS OUT THE ROOF

The counter balance to the US Dollar Index Elevator is the US exports Elevator.

The US export elevator has gone out the top of the building. Last month the jump was 9%! Those who have suggested that the US has been in a recession since 2007 have had to contend with very strong export numbers. The US economy grew 1.9% last quarter as strong exports more than off set declines in other areas. The US has become so wealthy that even housing construction and auto production are relatively small portions of our total economy.

The US Dollar will rise out of the sub-basement as the export elevator comes back to a reasonable level, or will it? During the "prosperity phase" of the Juglar Business Cycle, we can expect economies from around the world to purchase US capital goods. Computer networks are going to expand rapidly for the next 5 years or so. The US export machine is just getting cranked up!

One of the "trap-statistics" Keynesian big spenders (mostly democrats) use to encourage misguided policies such as minimum wage laws, $600 tax rebates and high taxes on productive assets, is the false number that consumers account for about 70% of the economy. The reality is, since business investment is calculated as net new investment and consumer spending is a grand total, business spending is actually about the same size as consumer spending. Government spending is the least important except that it has grown to be so large and because it is the least efficient spender of the three.

Duh! Over time, businesses only spend the net money they get from consumers and consumers only spend the net money they get from business. It really cannot be that consumers spend more than businesses. Just like supply must equal demand, production and consumption are two sides of the same coin.

The "trade" between the business and the consumer is a bit like the silliness of blaming speculators for the price of oil, is it the guy who is buying the contract or the one who is selling the contract who is driving the price? A couple of days ago a Sheik complained about how speculators are driving the price of oil down. Is it the consumer who drives an SUV who is driving up the price of oil or the gas station that charges what the market will bear?

The problem the oil companies have right now is that a growing number of consumers are parking SUVs and filling up one gallon scooter tanks. While I'm ranting, let me mention that price gouging and speculative manipulation or generally nothing more than easy, convenient, evil scape goats. You cannot gasoline price gouge the fellow who is willing to pedal his bike.

During the next several years, pent up US Dollars held by Asian producers of consumer products and oil producers will be "returned" to the US in the form of capital goods purchases. The dollar will rise as the demand for US goods stays strong. Ironically, strong US sales and the dollar will come close to riding the same elevator up.

Economic Slowdown

First we have to get through the rotating slow down. Countries around the world, yesterday it was India and Romania, are raising interest rates to fight inflation. Higher interest rates are slowing the world wide demand for goods (oil included). Mexico is one of many economies that are getting slammed hard by higher prices. Even US central bankers are now starting to tilt toward short rate increases to fight inflation.

Higher interest rates make holding money more profitable than holding goods. During the past 21 days, the S&P Energy Stock Index is down 12.6% while the S&P Financial Stock Index is up 7.5%. As any long term observer would expect, this turn in prices comes at a time of huge reported earnings by the energy stocks and huge losses reported by the financial stocks. The mid-cycle rotation is underway.

Don't Forget the Paradox of Thrift!

In recent news, the $500 billion deficit was "good news". We must always remember the paradox of thrift. In micro-economics we learned that it is "good" for an individual to save. Then, in macro-economics we learned that if everyone suddenly starts to save then net savings go down! We need people who are willing to borrow money to buy a house if we want the value of our house to go up. If everyone saves and none buy, then the value of our assets go down. Sometimes we really need government to take up the spending chore. The public has tightened down a bit. It is a good thing for the government to run a deficit when the economy is slow. The tax increases proposed by Obama would be exactly the wrong medicine for the economic conditions.

Stocks eventually suffer when the government pays down too hard on debt. Debt is a sharp knife in the kitchen, an indispensable tool but one that must be used carefully.


The US Dollar is GOING UP! In times of war, inflation tends to get out of hand and gold is hoarded. The cost of storing gold is like the cost of storing oil, it only makes sense if the price is going to outstrip inflation. Inflation rates are ready to roll over. The price of oil is going to feed through to the core inflation rate on the way down, the same way it did on the way up. A lot of investors are going to gradually grow tired of holding gold as global terror and inflation rates fall. Jump on the elevator for a fun ride. Buy financial, consumer cyclical, technology and industrial stocks (which includes transportation). Pharmaceuticals are also a good play.

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This article has 40 comments:

  •  
    Aug 03 08:00 AM
    I totally agree with everything you say. Dollar headed up--gold down and commodities down.
    Reply
  •  
    Aug 03 08:18 AM
    Please tell Warren Buffett he is wrong. He thinks the dollar will continue to drop for the next 5 to 10 years.
    Reply
  •  
    Aug 03 08:49 AM
    "Duh! Over time, businesses only spend the net money they get from consumers and consumers only spend the net money they get from business. It really cannot be that consumers spend more than businesses. Just like supply must equal demand, production and consumption are two sides of the same coin."

    In this simplistic and flawed analysis of yours, how does borrowed money by business and consumers figure into your conclusion? Does it mean that consumers and business borrow equally? I don't think so.

    "It is a good thing for the government to run a deficit when the economy is slow."

    There is no good time for the government to run a deficit. What would you rather have, a well run and fiscally responsible government or one that is running a $600B deficit? It is deficit spending by both government and consumers that is bringing down the dollar.

    The dollar is in big trouble. Private and public debt and monetary inflation are exploding. Unemployment is rising. The trade inbalance is killing us. Where's the good news to support the dollar? There isn't any.

    Duuuuuuuuuhhhh.
    Reply
  •  
    Aug 03 09:14 AM
    I could not disagree more. Whoever wrote this must be living in Disneyland. Maybe exports are up 9%, but the deficits of govt and trade are so far out of whack that even 100% export increase will not save the USD.
    Reply
  •  
    Aug 03 09:29 AM
    My impression is that the writer has difficulty putting numbers to opinions, and facts to support statements. When Warren Buffet says there are no US companies he wants, and starts buying overseas, I begin to question the value of the future dollar. If the dollar were to go up in value, that makes an overseas purchase doubly expensive. Not a good deal for a guy like Buffet.

    The worsening (projected) dollar drain for energy will reduce the value of the dollar, though there will be short-term rallies.

    The dollar will strengthen when:
    1. We have a positive balance of payments
    2. Our interest rates exceed the value of inflation
    3. The federal budget reflects income and expenses. (Excluding Capital spending)

    There is very little chance that the current export boom will creat enough international income to balance the outward flow of dollars for Oil and Gas.

    I'm not holding my breath. I am 90% invested in companies outside the US.
    Reply
  •  
    Aug 03 09:37 AM
    bhakta:

    Disneyland? You are being too kind to this poster.

    You owe Mickey and friends an apology.
    Reply
  •  
    Aug 03 10:34 AM
    It is precisely the foolish idea that a house is an investment that has created the present economic derivatie (bundled mortgage) nightmare.
    Houses were originally looked upon as a store of wealth a hedge against inflation if well taken care of. House appreciation speculation has been fostered upon the middle class as a reality. We see now it is a myth for most accept for the those captians of Fannie and Freddie, etc. We as a country need to: 1. produce things, 2. provide services, 3. save; and, 4. think.
    Reply
  •  
    Aug 03 10:44 AM
    Sadly, this writer is a product of the same witless idiocy that runs the country now.
    Reply
  •  
    Aug 03 10:48 AM
    I hope that you are right...
    But, everyting that I read says that you are a wide-eyed optimist.
    The US has sold out it's middle class & it will be a long road back, even if we start now.
    If you haven't noticed, great economies are not built on deficit spending.
    Reply
  •  
    Aug 03 10:56 AM
    A house is only an investment when you sell it and make a profit from the sale.

    As for the value of the dollar, perhaps if the fed stopped printing paper money like it was going out of style...
    Reply
  •  
    Aug 03 11:20 AM
    It requires years of study at the Maputo school of economics to believe the unbridled expansion of the currency pool will result in an increase in the value of the individual dollar.

    When the pigs are not only flying but landing on strips paved in gold, and the Airlines take $50 off your ticket price for every extra bag you bring aboard.
    Reply
  •  
    Aug 03 11:30 AM
    So much money has been printed with so much more to come that we are in a hyper-inflation period. Wages will not go up much as jobs will continually be lost and loan losses increase. The USA has had its golden years unless we find cheap energy. If not, the terrorist have won, the country is bankrupt, and most don't know it or care to believe it. The dollar will lose another 40%+ within 3 years and silver & gold will become real money again in place of the fiats of the present civilized old world. Because of the cheaping $ jobs will stop being sent over seas as we become the old, new 3rd world. Congress, the Fed, investment banks and dummified citizens are to blame for short term thinking that has destroyed our founders dream and warnings. With out cheap energy we can't work out of this hole. Buy PUTS while short term $ recovery exists, and take delivery of silver bars, eagles, maple leafs, & a gun. Read the silverstockreport.com on FAQ's and butlerresearch.com and save your butt with action. Watching the slide to disaster won't be as painful. The easy life is ending. Don't be fooled by the any near term $ strength just because the euro might stop raising rates or drop a bit. It also has an active printing press. Now, hope liquified coal gets a push to solve energy shortages, the Democrats allow off shore drilling, and Obama sinks in the polls. Can someone make a chart comparing the S&P500 with gold & the $ over the last 5 & 10 years? This should show the Bear market as it really is! How do you like less stock loss write offs and more stock tax on gain just due to inflation and no real value gain ?
    Reply
  •  
    Aug 03 11:31 AM
    Let's see what Washington does with energy next year. Having the Democrat controlled Congress killing the vote on drilling and then voting instead for 5 week vacations says our leadership will need to be flushed. That doesn't happen overnight. Cheap energy can fuel a complete recovery domestically by easing for the consumer, accelerate exports and create jobs.
    Reply
  •  
    Aug 03 12:08 PM
    Our saving grace is that our debts are denominated in US dollars.

    I fail to understand your hypothesis regarding the money spent by consumers not exceeding the money spent by businesses. are you saying consumer spending cannot exceed earned wages? I would say the net negative savings rate of americans disagrees with you.

    Have you observed those financial sector write-downs? These businesses (banks) are acknowledging their assets are worth less than what they paid for them. For material assets this would be deflation, but it's monetary assets. That X dollar value loss in value was real money borrowed and spent by consumers, but not being repaid in full. That is real consumer spending, but it will not re-emerge in the real economy to be spent by businesses because it was an asset. The businesses that held these written down assets, are (gasp) banks and they make money through loans that cannot be made because that money is gone. The money the banks must hold in reserve to take these losses came from somewhere right? That money was for future loans.

    We are going to accomplish through exports a return to the top? I guess we better learn from the chinese, they are the king of exports. How do they do it? Labor costs, its a race to the bottom if we compete on that level. Kiss your wealth goodbye if you want to play that game.
    Reply
  •  
    Aug 03 12:20 PM
    He's right. The US dollar will soar, just like Zimbabwe's.

    Printing money to pay debts you can't cover is very bullish for the dollar.
    Reply
  •  
    Aug 03 01:06 PM
    Foreign Reserves of US dollars are up about 17% in the past 12 months, thats $357 Billion dollars worth. This week's Barrons. Without that infusion the Dollar would have tanked even further. This pace cannot be maintained. When this support stops, it will do so abruptly. No country holding this debt will want to be the last one out of the door.

    It is a matter of supply, Internally we have Wealth Destruction which some believe will lead to a 30's type Depression, The Treasury and Fed are trying desperately to inject enough liquidity to ensure that the entire house of cards remains intact long enough to stabilize. Externally, the supply of dollars is escalating dramatically.

    This cannot continue indefinitely without the devaluation increased supply brings to the table.

    Reply
  •  
    Aug 03 01:24 PM
    After all that these so called Republicans have done to this country, why do some of you keep on saying crap about the Democrats? Is the Kool Aid that strong you can't see past it?
    Reply
  •  
    Aug 03 01:29 PM
    Another ill informed , uneducated or simply corrupt writer (must be long the dollar ) .The reason exports have increased is precisely because the dollar is cheap .The same reason americans buy chinese goods ,their cheap . If the dollar increases in value ,then the cost of these goods made in america become more expensive .Therefore exports will slow as they have in the past when the dollar was strong .This is true not to mention the fact that the US has massive debt getting worse .
    Reply
  •  
    Aug 03 01:56 PM
    Point of clarity please: What's in the US$ Index? I'd like to get at a better understanding of how it denotes the "price" of the US$. In the end it's got to be becasue of supply/demand, like the "price" of anything else. Based on typical fiscal, monetary and trade policies, there isn't a likely shortage of dollars. Even with trade improving a notch, and fire-sales of some US private equity, the balance of payments is still a huge negative.
    Reply
  •  
    Aug 03 02:31 PM
    This article should be seen for what it is: the last act of a desperate dollar-long to assist this engineered bottom we are experiencing.

    I believe he will have an "I Told You So" moment coming. As more and more desperate (and potent) measures are enacted, there will seem to be a Bonzai attack of dollar longs who will appear unstoppable. Stocks will stabilize, gold will stumble, oil will "fall" back. Hard-money advocates will begin to wonder.

    To keep this game floating the "regulatory" environment has made the transition to Fascism with remarkable speed. Imagine buying financials now when you cannot even value them, since they 1) are no longer subject to market forces; 2) have to exchange their own worthless debt for treasuries at the Fed which they then use at the discount window (and to which the Fed can say: "Hey look, we're getting treasuries as collateral at the window!"); 3) have to sell "assets" at 22 cents on the dollar but have to finance the sale with return provisions to protect the buyer; 4) have scheduled rule implementations delayed to keep them from having to bring level 3 onto the books and formally admitting bankruptcy.

    Even more unimaginable, imagine recommending that someone actually buy financials in such an environment.

    Where are we headed? Watch for the final "uptick" rule: where you cannot buy or sell a stock unless it is at a higher price than market. When that happens, dollar-denominated assets of any kind become totally worthless. Until then, it's all incremental.

    In any event, I think we'll get a dollar pop here. It might last 5 days or 5 weeks or 5 months. More "regulatory" shenanigans to come I am sure.
    Reply
  •  
    Aug 03 02:40 PM
    "Stocks eventually suffer when the government pays down too hard on debt. Debt is a sharp knife in the kitchen, an indispensable tool but one that must be used carefully."

    ????????? I have no idea what you are trying to say with that statement !!!!!!!! When you say Debt is a sharp knife that must be used carefully ......do you mean creating debt , or paying off debt ??????? because your sharp knife analogy is preceded with the negative comment about paying down debt ........and the comment of using debt carefully I assume to mean creating debt ......bottom line , a family OR a nation , cannot exist on credit forever , and I have no idea how you think being debt free is a bad thing ........when we paid down the national debt in the 90's , life was good , help wanted signs everywhere , and America was in prosperity ......THEN DUBYA comes in and prints 2 trillion dollars on the FED master card , which made life APPEAR good , but in reality , a ticking time bomb , that is now going to explode if we don't STOP counterfeiting money , and pay down some debt .....Washington needs to stop blowing money on BS ....and they can stick their 300 dollar stimulus welfare check where the sun don't shine ......take the 50 billion bucks and build some nuclear power plants !!!!! DO SOMETHING , BUILD SOMETHING !!!!!!!!!
    Reply
  •  
    Aug 03 03:33 PM
    thannagan, the dollar index (DXY) or (USDX) is a basket of currencies that is 70% euros and yen. www.babypips.com/schoo...

    So the dollar bulls are really saying that the dollar will move higher against those two currencies. It's like watching 3 guys jump off a 40 story building and then brag about who is going to hit last.

    August is the seasonally worst month for gold and 2 eurosystem banks just dumped 30 tonnes (600 million euros worth) in the last reporting period. Despite these things, gold is holding above 900 dollars an ounce. Oil is holding above 120. The so called dollar rally is just a sideways churning below the 200 sma that will resolve in another leg lower.

    Russia sold half of their US mortgage bonds. en.rian.ru/russia/2008...

    Watch for more of this kind of news as other countries divest US debt and dollars and move into other things. The gulf countries, which have currencies pegged to the dollar, are going to de-link, probably within 12 months. China is revaluing the Yuan steadily. All of these things put downward pressure on the dollar.

    Reply
  •  
    Aug 03 03:38 PM
    A CLASSIC article by a HOPEFUL LONG"er". Stupid as stupid does! I read the headline and KNEW CLH was the first post. Refer to previous sentence.

    I'm BUYING and POSSESSING gold and silver. Anyone else doing this? Or are you BUYING dollars, hahahahahahahahahaaha!
    Reply
  •  
    Aug 03 03:51 PM
    Mr. Guest....please look up "except"
    Reply
  •  
    Aug 03 04:09 PM
    you mean the Ameripeso lol yeah just keep printing more and more it will crash thus is why i am buying silver.I hate to say it the EURO is soon to be the worlds currency, just a matter of time imo
    Reply
  •  
    Aug 03 04:38 PM
    U.S. exports are still lagging imports, thus a large trade deficit. Calling that "out the roof" is an exercise in hyperbole. Here is the headline from the census.gov site www.census.gov/foreign.../

    "The Nation's international deficit in goods and services decreased to $59.8 billion in May from $60.5 billion (revised) in April, as exports increased more than imports. (11 July 2008)"

    That's not much to get excited about, lol. We are still on target to show a trade deficit greater than 700 billion dollars this year.

    The GDP number was and has been for some time flawed by the use of an inflation adjustment that is much too small. www.shadowstats.com/ar...

    If we use more realistic inflation numbers then the GDP is negative and has been for several quarters. www.shadowstats.com/al...

    Reply
  •  
    Aug 03 06:21 PM
    Please go learn something about economics. The dollar is dying and we have gutted our manufacturing, replacing it with dubious "services" including financial services which are literally melting down with no end in sight.

    In Q4 2007, Greenspan said there would be no economic stability until housing prices stabilized. Just a couple of days ago he said that housing prices were "nowhere near the bottom". The rise in exports is a rise in USD collected, not a rise in value. This is simply because foreign sales in strong currencies which are repatriated to a weak currency make the numbers look bigger, but when priced in something like gold, even those exports look tepid or weak.

    But party on, dude. People like you are giving me more time to move all of my wealth to gold and silver. The dollar will be lucky to survive at all.
    Reply
  •  
    Aug 03 08:42 PM
    The dollar going to get stronger. That is going to solve all our problems. A stronger dollar means higher short-term rates and a deeper recession. That means the strength now, only delays the revaluation later. The panic in the banking system really boosts the banks reserves at the expence of the borrower. The long term situation is full of patches on patches. The business community worring about costs to expand business cant be good for the dollar longterm. Hate to be on bottom of economy's dog pile. A little safety gold at the very very least!
    Reply
  •  
    Aug 03 09:32 PM
    I can see the author’s prediction coming true with a hypothetical yet likely sequence of events: (1) people get out of stocks and decide to hold cash, (2) cash goes into bonds, and (3) people don’t sell those bonds.

    I also find the comments about the euro and Zimbabwe hilarious at the very least. The U.S.’s debt is about $0.62 per dollar of GDP; the powerhouses in Europe have debt that averages out to about €0.75 per euro of GDP and Japan’s debt is about ¥196 per hundred yen of GDP.

    And the United States, thank goodness, isn’t confiscating soybean farms and coal mines for political purposes. If such an event were to happen, then comparing the U.S. to Zimbabwe would be appropriate.
    Reply
  •  
    Aug 03 10:05 PM
    User142,

    Those actions would cause a brief dollar spike...brief, because there would then be no economy backing the dollar, no economy to produce goods to be sold in foreign exchange, no tax revenues to pay the interest on those bonds. Just a lot of paper dollars that had been converted into paper promises of another unbacked sort.

    And the US isn't confiscating farms and mines yet. But they ARE confiscating huge percentages of personal income, and they ARE confiscating any property that can't be defended against their claims of impropriety. The farms and the mines just haven't been declared "contraband" or "essential national resources" yet. Give em some time.
    Reply
  •  
    Aug 03 10:09 PM
    I think the bottom line is that the USA needs to start building and manufacturing quality again .....I am completely baffled at GM and Ford's lack of creativity and foresight ......GM's latest gimmick is the hybrid Yukon !!!!! Great , a frickin' expensive monster , that will , ok , get decent gas mileage .......but what they need to do is go steal a toyota corolla , and a honda civic , and copy that sucker ....but they are stuck in the 1950's mindset , and they are too dang proud to say " hey the japs are beating us at our own game " ......and the US government needs to start building some nuclear power plants ......we don't need another 300 dollar check !!!!! go build something useful !!!!!!! You know a Sony TV ain't cheap .....you mean to tell me we can't compete with that ????? What in the hell is going on
    Reply
  •  
    Aug 03 11:58 PM
    I'm sensing a lot of gloom and doom vibes here. Hmm..., maybe its time to start investing in stocks again.
    The last time I hear US was still the largest economy in the world, no one else even came close. The total market capitalization of all the companies listed on the New York Stock Exchange is greater than the amount of money in the United States. Which economy but US has the capacity to absorb the savings of the world?
    American shares are beginning to look exceedingly cheap relative to the rest of the world and given that balance sheet of the financials are been aggressively cleaned up, I believe when the economy start turning around which it will, investments will flood the American market which will result in massive dollar gain.
    Economists, am I wrong?
    Reply
  •  
    Aug 04 12:58 AM
    Gloom and Doom have just knocked on the Door, they haven't entered yet.

    Before you knock the republicans, just remember that all of this started with the Democratic control of Congress, or is control of both Senate and House no longer considered to be majority.

    The Balance Sheets of the Financials are still being hidden. If Goldman, alone, did a deal similar to what Merrill just did. They would be writing down about $70 Billion. When going through these financial reports, you have to look at what is sitting on Level 3 or the Mark to Fantasy Level. That $70 Bil. above is based on applying 22 cents on the dollar to the $90 Billion Goldman had on its books in the first quarter.

    I gave up in looking in the first Quarter. It doesn't matter what they say anymore. It looks like the FASB's Mark to Market rule will not be suspended and ALL of the chickens will come to the BarBque.
    Reply
  •  
    Aug 04 01:54 AM
    " The U.S.’s debt is about $0.62 per dollar of GDP"

    Don't trot that old dog out again, it doesn't hunt. The GDP we have today is a hollowed out version of the GDP 20+ years ago. Today's GDP is mainly services (and a big part of those are financial services) and consumption spending. The banks and finance companies are falling apart so the GDP is falling apart even if the gov't won't tell the truth. Insurance is falling apart if you haven't noticed. Unemployment is rising and salaries are stagnating. Many companies have stopped giving raises. Consumption is waning as everyone cuts back. The GDP is going to tank far worse than most people imagine.
    Reply
  •  
    Aug 04 07:21 AM
    Wow! Minimum wage laws are bad. What we really need is maximum wage laws for incompetent CEOs. If business paid its workers decent wages we would not have minimum wage laws. If CEOs and other executives were paid what they were really worth there would be much more available for the work force; higher wages, increased spending, increased taxes, decreased deficits. I am now checking in to the nearest institution for the mentally deficient.
    Reply
  •  
    Aug 04 09:35 AM
    Paultaut:

    Sorry to differ with you, but the House and Senate have been in control of the Democrats since January of 2007.

    The sub-prime fraud schemes that have caused the current banking crises were concocted and effected long before. The bottom line is that there is no effective regulation or oversight in the mortgage and securities business.

    This is criminal not a partisan issue.
    Reply
  •  
    Aug 04 12:14 PM
    It doesn't matter who controls congress since George Bush constantly pulls an "end around" congress ........it's plain to me that any idiot that thinks he is going to save the economy by mailing me a 300 dollar welfare check is a complete moron ......and they are considering doing it again !!!!!! Obama also is hawking another stimulus check !!!!! Grand total will be 100 billion dollar welfare check ........hmmmmm how many nuclear power plants can you build for 100 billion dollars ?????? Hey Washington .....BUILD SOMETHING !!!!!!! Americans like to work and build things , give us a project you dip-shits ....I don't want your damn welfare check again .........and it is time for us to get the damn Iraqi oil .....hell that's why you invaded , stop pretending , and get it ....I don't want to hear another damn word about democracy and freedom
    Reply
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