In last night’s (March 24) televised Presidential press conference, the air of tension surrounding the ongoing economic crisis grew hotter than a habanero pepper in Hades. One of the most burning questions put to President Barack Obama was this: Is China right in calling for the creation of a new “super-sovereign” reserve currency to replace the currently dominant greenback?
Here’s the gist: Since January, the combined measures to revive the U.S. economy via bailouts, rate cuts, and rescue packages have added an estimated $400 billion to deficit projections for 2009 and 2010. (Congressional Budget Office)
In the eyes of China’s bank governor -- an increase in stimulus spending EQUALS an increase in the budget deficit EQUALS a decrease in the value of the U.S. Dollar.
Is he right?
According to the mainstream experts, Y-E-S; yes. “The U.S. Dollar will get weaker,” begins a recent news source. “Investors see little need to hold dollar assets as…the US budget deficit swells to more than $1 trillion, and with the trade gap exceeding $57 billion.” (AP)
Truth be told, an inverse correlation between the deficit and the dollar does not exist. On this, the December 2004 Elliott Wave Financial Forecast presented the following, ground-breaking chart of the past three decades of the US Trade Weighted Dollar versus the Current Account Deficit/Surplus (as a percentage of GDP).
Here are few of the startling results:
- From October 1980 to February 1985, as the deficit emerged as the largest in well over a decade, the dollar surged 50%.
- From April 1995 to December 2000, the deficit took another huge leap and the dollar rallied 34%.
And, these later observations: From December 31, 2004 to November 2005, the deficit widened to the largest on record while the greenback enjoyed a steady, 15% uptrend. Also, a record deficit in 2008 coexisted with a 6% rally in the U.S. dollar index.
Once again, the usual suspects have the picture completely and utterly backwards. To them, an increase in stimulus spending will lead to an economic recovery, which will then reduce the value of the buck as investors take their money out of dollar-denominated safe-haven assets. But as it’s often the case, one quick look at a well-made chart sets the record straight.