King Dollar Naysayer Nonsense

Larry Kudlow
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Posted: Mar 14, 2015 12:01 AM
King Dollar Naysayer Nonsense
Despite the conventional criticisms of the financial commentariat, both theory and evidence argue for a strong, stable and reliable currency as a crucial channel to prosperity. Just think of the reverse: If you could devalue your way into prosperity, Argentina would be the center of the world economy.

But lately, a loud and growing chorus is blaming the rising U.S. greenback for just about everything. "Multinational profits will suffer." "Imports and trade deficits will hammer the economy." "Stocks will fall." "Recession looms."

Wall Street insists that King Dollar is bad. It is wrong.

This falsehood is a near cousin to the idea that falling energy prices will wreck the economy. Also wrong. Energy will slow, but the rest of the economy will benefit.

In fact, the rising dollar, a key factor in the oil-price plunge, provides a double tax cut for the economy. Both will also promote world recovery.

Over the past year, the dollar has appreciated about 20 percent. So what happened? The S&P 500 is up 11 percent, and the American economy has actually improved. While the underlying economic-growth rate is still a soft 2.5 percent, real GDP was up 3.5 percent or more in four of the last six quarters. And nonfarm payroll jobs have increased 3.3 million in the past 12 months, much better than the 2.2 million jobs gain of the prior period.

And the inflation rate is nil. The consumer price deflator is flat. Import prices for the 12 months ending in February are down 9.4 percent. And finished-goods producer prices have slumped 3.4 percent.

What's happening? The dollar is up and oil prices are down. The economy, jobs and stocks are up, and inflation is down.

How could this be bad?

So let me dust off some of my golden oldies: King Dollar is a very good thing. King Dollar has far-reaching benefits that way offset any temporary small costs. King Dollar is pro-growth.

And if investors gain confidence that King Dollar will stay firm, global capital will flow into U.S. dollar markets. That means, according to investment strategist Jason Trennert, a strengthening dollar pays for a bit lower profits with stock-multiple expansion. Modest currency-conversion costs of U.S. corporate income earned abroad may temporarily translate into slower profits -- at least in GAAP-accounting terms. But this is small stuff. Actually, most of that money stays overseas to benefit from lower taxes. And many companies, especially technology firms, have demonstrated shrewd hedging acumen to take advantage of the King Dollar trend.

Anyway, as a result of the strong dollar, every import that American companies use for their products -- be it autos, computers, or mobile phones -- is vastly cheaper. And when products are finished in the USA, figuring in lower domestic-wage demands and interest rates, cheaper U.S. products will lead to stronger exports because of a sound dollar.

Remember Japan in the 1970s and '80s, when the yen was running over 300 to the dollar (today it's 120) and the country was a massive export machine? There you go. A strong currency leads to cheap exports from lower interest rates, zero inflation, and strong competitiveness.

In fact, the King Dollar/plunging-energy-price combination has substantially reduced the cost structure of American businesses, making them more competitive. And at the same time, the buying power of consumer incomes is significantly increased as prices for energy, food and virtually all goods and services have dropped.

And as economic editor John Tamny puts it, "When investors invest, they're hoping to get back the dollars they invested, plus an additional dollar return." Tomorrow's dollar should be worth the same as today's. That's the confidence value of currency stability.

How about some more history?

Between 1982 and 2000, as the dollar increased 178 percent, King Dollar (with lower tax rates and lighter regulation) presided over a stock market gain of 1,099 percent, a jobs increase near 40 million, and 3.5 percent average annual real GDP.

During the recent dollar decline period, from 2001 to 2011, as the dollar fell 25 percent, jobs increased a paltry 2.3 million, real GDP growth averaged less than 2 percent, and the S&P gained a measly 15 percent.

And don't forget the dreadful 1970s: The dollar plunged, the economy suffered through years of stagflation, and the real value of stocks fell significantly.

Yes, the world's currency system is in disarray. Europe and Japan are depreciating (won't work) and the U.S. is appreciating (nurturing growth). Yes, we need a new monetary system. Yes, we need better currency and policy coordination.

In any event, as the Fed slows its accommodation, and while pro-growth corporate tax reform is in the air, King Dollar is on the rise.

Stop whining, folks. It's a good thing.