U.S. Dollar Down But Not Forgotten - Why Does Everyone Love to Hate the Dollar?

Big names across the investment sector as well as many corporate executives have come out in the past year stating the Dollar will decline citing a whole host of reasons.  Many blame the U.S's large deficit and excessive government spending, some blame the Fed's easy monetary policies and still others say the U.S. is no longer a good investment because so many third world countries produce better returns.

That being said let's examine some correlation facts as well as state some economic facts in general.  First, all economies experience booms and busts; be they communist, socialist or capitalist.  Second, nothing goes up forever and nothing goes down forever.  Third, humans create economies and markets, and as a generality people are followers.  For instance when tulips in Holland during the 17th century were all the craze, everyone bought tulips.  In the late 1990's when the internet became something useful everyone bought dot-com stocks.  And, in the 2000's when real estate was projected to "run out" because they weren't making any more, everyone had to buy real estate.

Let's examine country debt to GDP numbers and their currencies over the past 20 years.  In Japan, 1991 public debt was approximately 70% of GDP; today it is over 200%.  In that same period the Yen has traded as high as 130 yen to the Dollar (twice, in 1993 and also 2011) and as low as 64 Yen to the Dollar.  Yen against the Euro, shows a very similar pattern, up and down in a very large range over that same period of time.  The entire time Japan's public debt increased substantially.  In the last 10 years the Yen has gained considerably against both the Dollar and the Euro while their debt continued to grow from 150% of GDP to over 200% of GDP.

Historically, the U.S. debt to GDP ratio exceeded 120% during WWII and then took 30 years to decline to around 30% of GDP.  In that period the Dollar gained and lost value many times against most major currencies.  It was not until the 1980'S when the Dollar went out of control climbing to an index of over 150 in 1985 - now at 76 for comparison.  In the early 1980's all the way through the early 1990's U.S. national debt rose steadily to the highest levels since WWII.  For the first five years in the early eighties, while the Dollar was setting records, the national debt increased over 50%.  The Dollar declined from it's all-time high in 1985 to around 76 in the early nineties while the national debt continued to increase.  So, the debt increased and the dollar increased, then the debt increased and the dollar decreased.  Maybe the dollar decreased because it became nothing more than a tulip, a dot-com or a piece of overvalued real estate - hitting an extreme.

So, those "Big Names" currently running around telling everyone that the sky is falling and the U.S. Dollar will become worthless because of the high national debt may want to examine all history instead of certain segments of history.  More than likely these are the same "Experts" that said in 2006 that the U.S. Housing market would recover by the end of 2007, beginning of 2008 at the latest.  They cannot help it, they are just people; followers.  They are following the crowd.  Since the beginning of 2002 the Dollar has fallen from an index of 120 to it's current level of 76.  In that same period the national debt has risen from 55% of GDP to 100% of GDP.  90% of the crowd will chase a market at the top or the bottom, maybe these "Experts" are just market chasers.

Currencies rise and fall because of economic growth within that country.  If you had $7 billion in cash, $1 billion in each of the G-7 currencies, where would you put that money to work?  China, a country that is fairly new to economic reforms and has had substantial economic growth and price appreciation for over a decade?  Japan, a country that has had minimal growth for 20 years and just had a large catastrophe that will require re-building?  Europe, 27 different and distinctive economies all with unassociated ideas on how to best run their own countries.  Not to mention banking and debt issues that require agreement by all 27 different states - have you ever tried to get 27 people to agree on one idea?  And the U.S., which has just gone through the worst economic downturn in over 70 years and everything in the country has declined in value over the past 5 years.  It is like the old Kmart Blue Light Specials, the U.S. is all on sale.

I would allocate 60% of that $7 billion to the U.S., 35% to Japan and the remaining 5% to Canada and Australia.  That thinking will eventually take hold and the Dollar will rise against most major currencies, the Yen will stay strong or in a tight range and the Euro will decline just because there is a better place to invest one's money.