August 30, 2016 Patrick Oliver-Kelley

The Dollar and the Fed still rule

With the world turning inward, we should recognize that countries are beholden to the US dollar more so than ever before. A mere hint of a shift in Fed policy sends shivers, up and down, the boulevards of most countries’ financial districts. While the US may no longer be the super economy it once was, having eased from controlling 40% of world GDP, to now controlling about 23% of world GDP, the dollar is still the superpower currency. In the last 600 years, there has been one mega currency in each century. The dollar has been Number One since it succeeded the Pound Sterling about a century ago and there is no rival in sight. In the last fifteen years, foreign currency reserves value rose from $3 trillion dollars to $11 trillion. Nearly two-thirds of those reserves are held in U.S. dollars. 90% of all trade, world-wide, is conducted in dollars. The dollar has never been more influential and the financial hegemony of the U.S. has never been greater.

Domestically, despite comments to the contrary, the American economy is flourishing. Unemployment is only 4.9%, newly created jobs increase by nearly 150,000 monthly, consumer confidence is strong, and new homes sales are higher than 2008. The second quarter growth rate was strong. Most of all the Fed did not bump up rates. Why? Inflation is barely 0.9%. Price rises will pick up as the effect of cheap oil and the strong dollar dissipate. Core inflation is 1.6% and wages are being pushed higher. The Fed, I believe is finding it hard to tell how loose monetary policy actually is. Several factors are holding down the natural rate: weak productivity growth. In 2000s, productivity averaged 2.9%. Since 2008, it has been 0.9%. Another culprit- Attention Sociopath Trump! – is being caused by an ageing workforce and population. We NEED the immigrants Trump is so eager to throw out of and to wall out of our country. Markets, too, seem to expect low rates to continue. However the strength of the consumer means there is a chance of a rate rise this year.

The economy will improve via two things: innovation and productivity, which are interlocked. It seems that all of the products that make our lives better were not around 30 years ago. And secondly, what is really important is gains in productivity. Back 100 years farms were producing 30 bushels of corn per acre. Now they’re producing 160 bushels of corn per acre, and of course, it takes fewer people to do it. Productivity is the name of the game.

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