Beginning at the end of World War II, the United States slowly rose to be the world’s largest economy. Because of it’s wealth, which enabled it to build a military second to none, the United States today is often referred to as the superpower of the world… in the same way Italy was once a superpower (Caesar), just like England was (when it had the world’s greatest naval fleet), and like other countries that dominated the economic and war power of their day.
For the majority of years that followed WWII the United States ran a trade surplus. That meant the U.S. exported more goods than it imported. Logically, more people wanted goods made in the U.S., resulting in great demand for U.S. dollars. Eventually, the U.S. dollar established itself as the most wanted currency in the world–the benchmark by which other currencies are measured. In fact, American’s dollar became so strong; many small foreign countries replaced their official gold reserves with U.S. dollars.
Since the mid 1980s, the tide of exports and imports in the U.S. has changed drastically. America now imports more than it exports. So much so, the U.S. now runs a huge trade deficit, all compliments of cheap goods being imported from China and sold at major American stores such as Wal-Mart. The U.S. has gone from being a “creditor” nation to a “debtor” nation.
Yesterday, I wrote about the “China Factor” and how, eventually, in my opinion, the U.S. dollar will be replaced on the world’s stage as the benchmark currency, unless the U.S. does something to fix its trade deficit and fiscal deficit. Foreigners don’t want to invest in, or trade in, a currency that is not stable. Today, in 2006, the U.S. Federal Reserve has very little gold backing its currency, all because somewhere along the way, the Fed got rid of gold as the legal reserve for U.S. dollars.
While I’ve often written about this, but haven’t seen it anywhere else, it is absolutely mind-boggling that the U.S. Fed has raised interest rates 17 consecutive times in the past two years and the greenback has actually fallen in value against other world currencies during that time period. Currencies are supposed to rise in value when their domestic interest rates rise. What would have happened if the U.S. did not raise interest rates in the past 24 months? Would the value of the U.S. dollar collapse? Maybe.
My message is this: If the American economy gets too soft, the U.S. Fed will not be able to drop interest rates too far this time because the U.S. dollar could get in major trouble. The last thing the U.S. wants is to pay for oil in any other form than U.S. dollars. As investors, foreign investments never looked as good as today all because of the delicate U.S. dollar. In my next commentary, I’ll talk about my favorites. Yes, we can profit from the changing economic tide coming our way.