While fiscal cliff stock worries wax and wane, smart investors should be thinking about investing for a devalued dollar. One of the reasons for US fiscal problems is, in fact, an overly strong US dollar. Across the world countries that want to export goods to North America repeatedly purchase US dollars. One reason is that for all its problems, the dollar is a reliable reserve currency. The other reason is that nations such as Japan, Taiwan, mainland China, and even Latin American late comers such as Colombia buy US dollars with their currencies in order to keep their products competitive in North American markets and worldwide. However, the increasingly large US budget deficit will tend to decrease the dollar’s value. Thus investors should be thinking about investing for a devalued dollar. Fundamental analysis of intrinsic investment value and the margin of safety of an investment need to take into account the fact that the US dollar may be worth less in years to come. With these thoughts in mind read on about investing for a devalued dollar.
A Strong versus a Weak Dollar
A strong dollar makes imports cheaper. A strong dollar also leads to more purchases of imports versus products manufactured at home. This has led to a decline of US industry and a negative balance of payments. The decline of US industry has led to a decline in middle class jobs and the taxes that these jobs used to support. An overly strong dollar leads eventually to a weaker US economy. A weaker dollar will lead to a more competitive American economy and result in more jobs back home, more middle class jobs, and more taxes paid to the US treasury. But what does this have to do with investing for a devalued dollar? If the dollar goes down in value, the eventual result could well be a resurgence of American industry.
Where Things Are and Where They Are Headed
The US economy has been in a mess. The immediate cause is the Great Recession of 2008 and onwards. Reasons for the recession include excessive government spending. Reasons also include short sighted investing. The ever more common practice of reading the market to gain short term profits takes necessary capital out of play. In our article, Investing and the Continuing Fiscal Cliff Drama, we state that the main problem for investors today is that the investing future is hard to see due to continual infighting on Capitol Hill. However, the long term future may not be that hard to see. The central features of the US recovery have been the Bernanke Doctrine, the policies of the US Federal Reserve as outlined by its chairman, Ben Bernanke and continued spending by the federal government despite mounting deficits. It may well be that the point of all this is to devalue the American dollar. This would reduce the value of a trillion dollars in dollar reserves held by China. It would make the practice of buying dollars to prop it up artificially ever more costly. This pair of policies is likely to reduce the value of the dollar over time to a point at which American industry revives, imports fall, and more middle class jobs generate sufficient taxes to balance the federal budget. Investing for a devalued dollar may well have to do with investing in manufacturing stocks in the good old USA.