Will the Occupy Wall Street protests have a detrimental effect on the dollar? No doubt some protesters hope so, and currency manager Axel Merk says the notion isn’t farfetched.
“On its face, suggesting that the Occupy Wall Street movement may threaten the U.S. dollar may appear like a tall order,” he writes in commentary on Merk Funds’ website. “However, simply dismissing Occupy Wall Street as a fad may be a big mistake, just as it is a mistake to dismiss the Tea Party movement …To determine where policy makers and with it, the U.S. dollar, may be heading, it is important to understand that the driving forces behind both movements have common roots.”
The short explanation, he writes, is that rising costs coupled with stagnating real wages breeds an environment of social unrest. While the tea Party and OWS movements are the face of this “unrest”, it helps to dig deeper and analyze the root causes to better understand and assess the ultimate implications of these protests.
Merk then goes on to recite the litany of public policy and private market events that got us to our present economic state. He begins with Alan Greenspan in the late 1980s and policies that rapidly increased the use of credit. He then moves into the tech bubble of the late 1990s, the terrorist attacks of 9/11, Asia’s entry into the capitalist system, rising commodity prices and labor outsourcing.
“The movements have been years in the making and are the result of a highly intoxicating cocktail of policies that have driven recent global dynamics,” Merk says. “The alcoholics are our policy makers; the protesters, though, are the ones stuck with the hangover. Unfortunately, it does not look like anyone is going to sober up anytime soon.”
So what about the link to the U.S. dollar? Merk offers a few observations:
- “Driving growth through debt (also at the government level) drives up the current account deficit. In our analysis, currencies of countries with a current account deficit are quite sensitive to changes in perception of economic growth. Foreigners may be more inclined to finance a current account deficit when a country has a positive outlook on growth. As such, the U.S. may be tempted to promote growth at just about any cost. Previous Administrations are just as guilty as the current one. Handcuffed by gridlock in Congress, the Administration now suggests allowing homeowners to refinance their mortgages even if they owe substantially more on their homes than they are worth. Who benefits? The primary beneficiary may be economic growth, as those that refinance are likely to go out and spend those savings - many of them are likely to buy new gadgets on credit. It's a form of stimulus that makes good politics, but if politicians really cared about consumers under water in their mortgages, they would require that the same monthly payment is made by consumers, but apply the savings of a lower interest rate to pay down the principal of the mortgage."
- “Of longer term concern to us is that the increased political polarization will make it ever more difficult to agree on major entitlement reform. We must make health care and social security sustainable. There are simply not enough rich people to tax to solve the problem long term. But odds are high that tough political choices cannot be made. The path of least resistance may well be that benefits are nominally paid to live up to promises, but the purchasing power of the payments will be eroded. Differently said: inflation may be the path of least resistance. The one reform item Democrats and Republicans appear to agree on is to redefine the CPI to achieve just that.”