The World’s An Unfriendly Place When King Dollar Refuses To Roll Over

The World’s An Unfriendly Place When King Dollar Refuses To Roll Over

Headed into 2020, the combination of the Sino-US trade truce and a dovish Fed set the stage for the dollar to extend declines logged in the fourth quarter, providing a fillip to the reflation trade and bolstering global growth in the process. Or at least that was the thinking for some market participants. But you know what they say about the best-laid plans. The narrative made sense. The "Phase One" trade deal and dozens of rate cuts from central banks around the world ostensibly laid the grou
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3 thoughts on “The World’s An Unfriendly Place When King Dollar Refuses To Roll Over

  1. Debt/deflation spiral evokes a paralytic response from central banks especially against a backdrop of high debt loads. One day defaults will fix this but the political appetite for that today seems rather low

  2. I would be interested to read such a post.

    As I understand it, the theoretical terrors of deflation relate to goods and services that are somewhat discretionary, meaning you can buy them now or later. If prices are declining, consumers will defer purchases now in hopes of lower prices tomorrow. Deferred purchase -> lost revenue -> lost wages -> lower economic activity. If we had a whiteboard, we could draw that as s downward spiral 🙂

    They also relate to a scenario where debt service remains fixed while the debtor’s income declines. In addition to being painful for debtors (think borrowers, bond issuers, etc) this could also make creditors (this lenders, bond buyers) think twice about making new loans. Extend that thought to dividend paying companies too.

    In addition, deflation is frightening because historically falling prices may be associated with economic contractions, even if causation is unproven.

    We don’t have much modern experience with deflation in the US or any other developed country, so there’s some fear of the unknown too. There’s been deflation in specific industries – PCs were getting cheaper every year for a time – but never broadly.

    However, prices of goods and of services are affected by different factors and behave differently. Notice that the things mentioned in that Atlantic article are largely services: education costs and healthcare. The one major item that is sort of a good is housing – though housing is also a service, and perhaps real property should be in a third category of “asset”.

    Services are largely a product of the domestic economy. College tuition, medical insurance, apartment rent, aren’t being imported from China. The USD level isn’t all that relevant to the price of those services. I don’t know how a stronger dollar would import deflation in my kids’ college tuitions.

    These also happen to be purchases that are largely non discretionary. If medical insurance premiums are expected to be cheaper next year, you’re not going to put off buying insurance this year. If rent is expected to be cheaper next year, you’re not going to live under the freeway overpass this year (by choice anyway).

    So, deflation in the things listed in the article – which happen to be the things most crushing average families – might not be such a terrifying thing after all. There’d still be losers, especially from housing deflation. The preferable alternative might be for incomes to go up rather than for medical insurance premiums and rents to go down (maaaaybe).

    King Dollar also doesn’t have all that much control over the price of those things, as far as I can see.

    Anyway, goods inflation has been running much weaker than services inflation for many years now. I don’t have the FRED charts handy but they’re easy to call up. I want to say, from memory, that goods inflation is something like 1% or <1% while services inflation is more like 3-4%?

    This begs the question of whether CPI correctly measures inflation as experienced. Don’t know about everyone else, but the vast majority of my personal and business spending goes to services and sort-of-services (college tuition, healthcare, mortgage, taxes, office rents, professional and business services, data and other subscriptions, etc). The rest of my spending is mostly on non-discretionary goods. No new Porsche lately, ha ha. The USD can import all the deflation it likes, it won’t have much direct impact on me or, I’d wager, most of H’s readers. The impact on asset prices could be a different story.

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