What Is The Future Of The Dollar?
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Politics and Activism

What Is The Future Of The Dollar?

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What Is The Future Of The Dollar?

Last Wednesday the Federal Reserve announced in their press release that the case for an increase in interest rates has strengthened but ultimately decided not to take any action at the moment citing solid job gains as well as an increase in household spending. With the goal of fostering max employment and price stability the Fed addressed the low inflation below the target of 2%. But what are the bigger implication of keeping such a low rate?

One of the main concerns for global investors like Warren Buffet is the American current account deficit which has been welcoming more capital inflow from abroad. For example, the Net International Investment Position (NIIP), which measures the gap between US holdings of foreign assets and foreign holdings of US assets, has gone from 10% of GDP in 1980 to -40% in 2015 (Exhibit 8). With such a disparaging deficit, the bet against the dollar will prove to be a prudent investment.

While some may argue that the decreasing rate over a 35 year period only reflects the attractiveness of foreign investment, America cannot reasonably expect that foreign lenders will be so willing or even capable to lend at the current pace. China, who holds close to $4 billion in foreign reserves cannot always be expected to be so willing to lend (Exhibit 10).

In addition Berkeley economist Obstfield and Harvard economist Rogoff advised policy aides to regard the US current account deficit as a ”sword of Damocles“ hanging over the global economy, signifying that the United States will eventually have to balance their deficit in order to survive.

While it is true that the US Dollar has dropped 21% from 2002 to 2014 and then gained that back in the most recent two years, the lack of growth in the economy is still a major concern for global investors. The major economic superpower of the world, the US, cannot be an economic model to a failing Eurozone nor to a floundering Japan.

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This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.
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