Looks bad, doesn’t it? Poor economic forecasts, out of control energy prices, war – perhaps the USD has run out of luck.
But don’t trade in all your greenbacks yet. The US is still a formidable economic power, and it’s been here before. And besides, what currency is perfect?
Take the Euro. Perhaps Germany is doing well but the same is not so true of France, Spain, Italy, Portugal, Greece, and Ireland. Growth seems to be slowing for all, while their housing prices are starting to decline, and their share of global exports is shrinking. Some experts predict a Spanish depression around the corner, and fear that Italy will either leave the European Union or need to implement reforms that are the equivalent of political suicide. All of this adds up to rough times ahead for the EUR.
Japan seems to have dug a deep hole for the yen. Low interest rates have created a huge carry trade market. To combat inflation, the Japanese will eventually need to increase interest rates – as they recently have done – which threatens to damage the carry trade and cause a massive correction, as it did in 1998. Cheap Japanese exports will also take a beating.
The GBP may also be in the process of repeating history. Although its economy is closely linked to the US, the pound has not materially changed value in relation to the USD of late. As in 1992, the Bank of England is maintaining high interest rates. This situation cannot last.
What about China? Bigger isn’t necessarily better. Although China is experiencing a growth spurt, it faces some enormous challenges. In about ten years, China’s working age population will peak, then steeply decline. The current expansion of output capabilities will create extensive infrastructure that might not have the employees to use it. This lack of productivity is reflected by the incremental capital output ratio, which compares unfavorably to other Asian countries during vital historical investment phases.