The dollar has hit its lowest point against the euro in a year, falling 18.5% since its peak on October 27, 2008. The dollar's decline has driven some of the Dow's rise to 9,748. Since March-market lows, a one-point decline in the U.S. Dollar Index has translated into a roughly 250-point gain in the Dow. At this rate of dollar decline, the Dow would reach a record high of 14,200 sometime during the summer of 2010.
Readers Respond: How to Protect Your Investments Against the Dollar Decline
However, all of the Dow increase since March is not due to the dollar decline. A lot of it is due to just plain ole investor relief that the Stimulus Package prevented a global economic collapse. Confidence has been restored, but only somewhat. Therefore, the Dow will not continue to rise at its current rate, regardless of what the dollar does.
Second, the dollar will not continue to decline at its current rate, either. A lot of that, too, was investor concern about the dollar's value given all the monetary and fiscal stimulus. There is still plenty of concern, based on expectations of future inflation. The idea is that when the economy turns around, too many dollars will be chasing too few goods. Hence, inflation. Hence, a cheaper dollar.
But, will the economy really turn around like it did in the past? I don't think so. Banks are still not lending. They are sitting on the stimulus money. Consumers aren't purchasing. They are still losing jobs, and they are getting paid less for the jobs they do have.
Bottom line? The economy will continue to go sideways, and perhaps even decline again. Stimulus spending can only hold up the economy for so long. Without bank lending, we may very well see a W-shaped recession. If this happens, the dollar will spike in a flight to safety and the Dow, instead of rising to 14,000, may instead retest its March low in 2010.
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Comments
“Banks are still not lending. They are sitting on the stimulus money. Consumers aren’t purchasing. They are still losing jobs, and they are getting paid less for the jobs they do have.”
This is exactly why I think forcing stimulus bailout money into banks was a bad move. The banks are sitting on the money, still paying enormous bonuses. Not much has changed. The only difference is, now, tax payers are on the hook for the “cost of doing business”
The government needs to make up it’s mind. Either the government is in charge of the banking system, or it isn’t. If it is, they need to just take over insolvent banks and clean them up, if they are not, they need to stay out of it and allow “too big to succeed”, to just plain fail and allow the carnage to be sharp and fast.
Hi John,
I agree completely. Bank nationalization may be the only answer, at least until the toxic debt is cleaned up. This is the direction Paulson was headed last fall…I really thought it was just going to happen.
I, for one, do not want to live through the carnage option.
Kimberly
There are options other than nationalization.
You don’t want Congress to be any where near this. You may want to check out Fannie Mae and Freddie Mac.
BTW this is the third time I am pointing out that our national debt is $10 trillion more after we account for the debt these two nationalized organizations carry. They will be “accommodated” by us, the tax payers. I am not willing to put my money into this quagmire.
The dollar is going to hurt big time if the “secret sauce” about these two org’s came out in the open. It would be wise to fix the lurking problem programs we have created with AIG, Citi, Fannie, Freddie, Social Security, Medicare, Medicaid before we take on Healthcare overhaul. We cannot continue plans that individually are insolvent and expect the next one will somehow be better.
Fool me once shame on you, fool me twice shame on me.
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