Myth: The strong dollar policy means that the U.S government will do everything in its power to make the U.S. currency as good as gold.
Reality: The strong dollar policy is a rhetorical device used by Secretaries of the Treasury historically to keep the markets guessing about U.S. policies that will affect its relative value to other currencies and thereby encourage the flow of foreign capital into U.S. Treasuries (and finance U.S. deficits).
Here is the definition of the strong dollar policy per Wikipedia (emphasis added):
“The strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury securities. The United States Secretary of the Treasury occasionally states that the US supports a strong dollar. Since the implementation of this policy, the dollar has declined substantially. Despite this, the policy keeps inflation low, encourages foreign investment, and maintains the currency’s role in the global financial system.”
Note that the strong dollar policy is not based on the purchasing power of the dollar with respect to goods and services, the criteria by which most ordinary Americans judge the strength and stability of the dollar. So when incoming secretary of the Treasury Steven Mnuchin says he is (or is not) in favor of the strong dollar policy, he is talking about a world of relative, not absolute, values. Most of the major currencies are depreciating against goods and services and that could be documented by anyone who took the time to do so, but since 2011 it has appreciated against other major currencies.
Wikipedia is correct in explaining that a truly strong dollar would encourage dollar-denominated bond purchases, but that is only within the realm of relative currency values. Even then, the dollar is not always strong against all currencies all the time – another fact of economic life that can be easily documented if one were to take the time to do so. As a matter of fact, as we have shown on numerous occasions, the dollar, when measured by the Dollar Index, is in general long-term decline, which is another way of saying it is in long-term decline against other major currencies.
Thus, the Wikipedia definition is correct on that score as well. Once again, here is that chart, with apologies to those who have seen it before. Note too that gold by comparison is in a long term uptrend against the dollar (and most other currencies as well), making it a productive hedge and long-term alternative for private portfolio managers without a political or economic bias. If you are interested in long-term wealth preservation, you should simultaneously be interested in gold. The strong gold reality counteracts the strong dollar rhetoric.
Stay tuned. Part Two to follow. . . . . .
