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Don’t Expect Inflation Anytime Soon

It’s no secret that most of the things we buy today are made by Chinese workers. We buy other things from European and Japanese workers, and we buy oil from the Middle East.

When the U.S. dollar gets stronger compared with the currencies in these countries, it buys a lot more stuff. That’s exactly what is happening now. Our dollar is getting more valuable, compared with the Euro, the yen and the yuan.

Here is “takeaway” theorem number one:

A stronger dollar is deflationary to the U.S. economy.

One reason for this is that our economy is stronger than most others’. It’s not very strong, but compared with most, we look like The Incredible Hulk. We still have the rule of law here. We still have intellectual property rights. We don’t have stifling labor union rules that make our workers noncompetitive in the global market. And don’t forget the United States is full of consumers who love to buy things.

A second reason our dollar is gaining strength is that our competitors are weakening their currency on purpose. The fact is that Japan, Europe and China need to sell a lot of stuff to us. When they cheapen their currency, it makes all of their products seem to be “on sale” for American buyers.

How do Japan, China and the Eurozone countries cheapen their currency? It’s simple. They just tell the world they are willing to print copious amounts of money. They don’t actually have to print money; just say they are going to do it.

Here is an example. In November 2012, just prior to his election, Japan’s Prime Minister Shinzo Abe said, “If we come into power, we will implement bold monetary easing through tight coordination with the Bank of Japan.” He called for “unlimited” easing.

The phrase “easing” is just a euphemism for printing lots of money.

Here is an example of how the Chinese view the situation. In March 2013, the president of China’s huge sovereign wealth fund said, “The currency war situation is quite severe. China is definitely a victim.” He warned Japan against using its neighbors as a “garbage bin” by deliberately devaluing the yen.

Europe has maintained a high profile regarding its currency as well. Mario Draghi is the president of the European Central Bank. In a February speech, he said, “I don’t have a cool attitude at all with respect to these levels of inflation.” Inflation is too low in Europe. Remember how you can get inflation? You threaten to print money to lower the value of your currency.

Here is “takeaway” theorem number two:

A weaker Euro is likely to cause higher inflation in Europe.

America has complained for years about how the Chinese manipulate their currency so that Chinese goods are cheaper than American-made products. Just a few months ago, the Treasury Department stated diplomatically that the Chinese currency is significantly undervalued. U.S. Senators Sessions and Brown stated it more precisely: “China’s currency manipulation weakens our economic recovery and makes U.S. exports less competitive, which is why we must combat it with every tool in our toolbox.”

Some people refer to these tactics as a “currency war.” The idea is that each country devalues their own currency so that their products are the cheapest in the world. They get market share all over the world, and other countries lose employment and wealth. In my opinion, the United States and other countries are continuously in a currency battle and have been for decades. It’s not something new.

If you find this topic interesting, a good book to read is Currency Wars by James Rickards.

Here’s the bottom line. Our economy is one of the strongest on the planet right now. We are talking about raising interest rates. When we do, more money will flood into U.S. bonds. This will make the dollar even stronger, and this will reduce the likelihood of inflation in America. How long will this deflationary trend persist? Until other parts of the world become more attractive to investors, causing them to sell U.S. assets and move their funds out of the country.

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