Not a lot of time to read the news lately, but I caught a Bloomberg Op-Ed today, ‘Strong Dollar Advocates Make a Weak Case: Schnidman and Nadler‘.
In it, the authors claim that, “What gets lost in this clamor is any discussion of winners and losers from a strong U.S. currency”. They go on to detail their research in comparing the S&P 500 to a dollar index:
This comparison of USD (U.S. Dollar Index) and the SPX (S&P 500) shows that on each of the seven occasions since 2008 when the dollar index reached an intermediate high, the S&P 500 hit an intermediate low. Perhaps no other asset in recent years has traded as precisely in (inverse) tandem with the market as the U.S. dollar. A weaker dollar might be easy fodder for politicians seeking to score rhetorical points, but it also has provided fuel for every intermediate market rally since 2009.
Firstly, it seems that one could argue from this data that monetary policy is being used solely to benefit equity investors, and that the Federal Reserve has largely achieved this goal.
Secondly, the authors seem to be ignoring that a weak dollar causes all prices to rise. While it may be comforting to see the nominal value of your investments go up in the short term, in the long term the purpose of investing is to increase future consumption (aka standard of living). If a weak dollar increases the cost of future consumption more quickly than it does the value of your equity investments, aren’t you still “losing”?
At best, the lift to equity markets described above represents a wealth transfer from holders of other asset classes (ex. cash, real estate) to holders of equities. One could call this an extremely regressive tax, as equity owners are more likely to have a higher economic status. As I’ve mentioned elsewhere, IRS statistics on top wealth-holders show that 55% of the increase in wealth enjoyed between 1992 and 2004 was due to increasing securities prices alone.
As I have not yet amassed enough wealth to gamble it in equity markets or anchor it in real estate, I am confined to paying off debts and holding cash (which I’ve hedged). This makes me, a college graduate and young professional, one of the biggest losers from a weak-dollar policy. It erodes both my assets and the purchasing power of my income.
How other young people in similar circumstances (i.e. not having inherited a family fortune or business) can consistently support policies and politicians that explicitly undermine their economic mobility is difficult to understand.