Foreign investment creates a strong U.S. capital account, which results in an increased demand for U.S. dollars. On the other hand, American consumption of foreign goods takes money out of the country, resulting in a debit to the capital account. A strong U.S. economy however, can attract enough foreign capital to offset a potential trade deficit. For years now, the U.S. has been a consumption machine fueling world economies, even as it increases its debt and continues to borrow the money necessary to support consumption. This permits other countries to export to the U.S., thereby giving their economies an outside opportunity to continue growing.
Demand for the U.S. dollar has been on the rise again lately. Due primarily to the failed policies of their own central banks, many foreign investors are buying American stocks and bonds, which are directly tied to the demand for dollars, because that’s what these financial instruments are required to be purchased with. As I’ve stated numerous times in this blog, it’s great to be the smartest kid in your class, but you can’t take the position for granted, especially considering that you’re the only imbecile (26-50 I.Q.), in a class full of idiots (0-25 I.Q.), because the first moron (51-75 I.Q.) to join the class, will upstage and replace you instantly.
Speaking of the smartest in a class of idiots, how about next week’s election? Neither candidate has presented an economic plan that can possibly survive in its present form. Much more importantly, neither candidate has even attempted to address the issue of economic policy failures, implemented and detonated by our Federal Reserve Board. At no time in history has the Board ever really been made accountable for their actions by our government. Rather, the government simply asked them (the Fed) to drive the country to economic growth and prosperity, gave them the keys to the car with all the tools to keep it running, and hoped for the best. But over the past twenty years, they’ve crashed the car and wrapped it around a tree. The problem is that the government hasn’t acknowledge the crash, or reprimanded the child, and is not even aware of the fact that they’ve collected the insurance and purchased a new and even more inappropriate vehicle.
Likewise, the Fed made the tools available to investors and corporate America, but they failed to provide instruction. Even worse, they permitted flagrant misuse of the tools, such as corporate borrowing of today’s “cheap money” to buy back company stock, driving up short-term investor profits (and executive bonuses), but leaving the company an over-fed and over-priced sloth with no room to continue growing, or incentive to thrive. Without the necessary economic growth conditions in place and working, a Fed increase of interest rates will stifle growth and strangle investor profits. In a thriving economy it’s not a problem, but an increase of one-percentage point on the 30-year bond would cost the country an additional $1.6 trillion in interest over a decade. Additionally, based on a Bloomberg Barclays sovereign-debt index, a one-percentage point increase in interest rates equates to $2.1 trillion in losses for global investors. In keeping with my blog’s main theme, owners of physical precious metals will benefit, regardless.