11/28/2012 6:45 PM ET|
Bitter pill: Lower pay, higher prices
Dollar already dropping
The good news is that we're on the right track. With Greece getting another deal to cut its debt load this week, Europe looks a little less vulnerable to economic collapse. That's boosting the euro and dropping the dollar. If Washington can get a short-term extension on the fiscal cliff done -- as looks likely -- that will add further downward pressure on the dollar, since fewer people will be scrambling into "safe haven" assets like the dollar and Treasury bonds (as they did back in August 2011 when Standard & Poor's cut our AAA credit rating).
And the Federal Reserve is preparing to do its part in a few weeks as it gets set to replace the expiring "Operation Twist" initiative (which had the central bank selling its short-term Treasury bond holdings and buying long-term bonds at a rate of $45 billion a month) with a new purchase program. The new program, which will be the fourth round of "quantitative easing" since the 2008 financial crisis, will likely see the Fed continue its $45 billion-a-month in Treasury bond purchases, but funded with newly created dollars.
Combined with the ongoing "QE3" program of mortgage purchases, the Fed will be injecting $85 billion a month in new dollars until the job market improves "substantially" in its view. Who knows how long that will take? Already, the Fed's actions have caused the monetary base -- a measure of the money supply -- to explode from $800 billion before the crisis to $2.7 trillion now.
If there is more of something floating around, it becomes less valuable, and the dollar is no different from any other commodity. If there is less demand for dollars from the Chinese, the U.S. dollar will become less valuable. That will help reduce the price gap between U.S. and Chinese goods for shoppers from Beijing to Shanghai.
What it all means
For workers and the middle class, this means a few more years of austerity with flat wages, higher inflation, less spending and more saving. We must also engineer a re-acceleration in labor productivity. We need workers to get more done during their hours on the clock via new machinery and upgraded equipment. Like I said, it won't be easy, and it will require a careful balancing act by the Fed to keep inflation from getting out of control.
But if we're going to close the competitiveness gap with China and India, we must do it via a combination of lower inflation-adjusted wages, increased productivity and more-desirable goods and services. That will eventually increase the demand for American workers, and in time, result in an increase in inflation-adjusted wages again. It will also increase opportunities for export-oriented small businesses.
Thankfully, you can use your retirement account to ease the pain.
A weaker dollar will be a boon to stocks (especially foreign issues), commodities and precious metals. All of these will move higher on a combination of better economic growth prospects (via exports) and a loss of the dollar's purchasing power. Either way, as the greenback weakens, investors should be looking for opportunities.
Examples include iShares Silver Trust (SLV), United States Oil (USO) and iShares FTSE China 25 Index (FXI) exchange-traded funds. For more nimble traders, I've been recommending shares of individual energy companies as well as a play on industrial metals to my clients including the PowerShares DB Base Metals (DBB) exchange-traded fund and Tesoro (TSO). Tesoro, a petroleum refiner and marketer, is up nearly 10% since I added it to my Edge Letter Sample Portfolio on Nov. 16.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column in his personal portfolio. He has recommended PowerShares DB Base Metals and Tesoro to his money-management clients.
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I think what you are saying is that as soon as we get to the standard of living that China has, we will start making things here again. Wages will be lower, working conditions will be poorer but our industry will return? I'm glad we have that going for us.
The Fed can keep printing until chinese crap is too expensive for us to buy but don't think for a minute that the trade will ever go in the other direction. Free trade with China was never going to be a two way street. They always dangled their huge untapped market under our noses but if they can make it themselves, they won't be letting our stuff into the country. Unlike our greedy capitalists, they know better than to export all their jobs to other countries. My bet is that when it comes down to it, the other Asian countries will also put up walls.
The only upside is that we will start making things here again. Wages will be lower, conditions will be poorer, and as a nation, our standard of living will lower to the level of the rest of the world. That was always the promise of free trade.
As depressing as the article is, I do agree with the investment advise. If you are not invested, inflation is going to eat you alive.
"America is a patriotic place. We're proud of our heritage. We like to win."
If we're so patriotic, why do jobs move to foreign countries? And if we're so proud of our heritage, how come the country is broke - no one wants to pay for that heritage or preserve it? Pride can be a sin & lead to downfall.
America is screwed, no two ways about it. Globalization and outsourcing did it. How can you have a country when all your goods are made in foreign countries by cheap labor? It's a slow death and doesn't end until America becomes like the couniries where the stuff is made. How can you have pensions, benefits & entitlements when you're competing with people who will work for 50 cents/hr with no bathroom breaks? This has been going on for decades and is coming to a head because the government can no longer be run on fumes. The U.S. gov. never adjusted to this reality, so it's bankrupt. Weak dollar - it's not even worth the paper it's printed on. If it wasn't for the Chinese lending us money, we'd be sunk already. The U.S. Titanic is going down - make sure you get a life preserver and make it to the life boat.
The fix is easy but the Dumbocrats won't get off the free social welfare parade. We need to cut expenses in the government. It's like any household budget....spend the amount you make....not borrow 40% from China every year to pay your bills.
This tax and spend program of Obama's will turn the US into California....bankrupt!!
Every democrat on these boards says the same thing, TAX, TAX, TAX the rich.
CUT LIFETIME MEDICAL/DENTAL BENEFITS AND SALARIES FOR GOV'T WORKERS AND POLITICIANS?
NO MORE "LIFETIME SECURITY" DETAILS, EVEN WHEY YOU ARE OUT OF OFFICE?
STOPPING WASTEFUL SPENDING ON PROGRAMS LIKE SOLYNDRA THAT WENT BELLY UP ANYWAY, AND THE INFAMOUS "CASH FOR BLUNDERS" THAT FIZZLED...?
STOP BAILING OUT MAJOR UNION RUN AUTOMAKERS AND BUSINESSES, AS WELL AS BANKS AND MORTGAGE COMPANIES?
Yes, NEW revenues WILL be needed, thanks to Nobama and the Democratic leeching that has been done. But then again, if you REALLY want to fix the problem, you need to fill the HOLES that continue to BLEED...Putting a band aid on the problem WON'T fix it, and neither will JUST raising taxes on the "rich" and "super rich"... stitches are needed for these economic holes, and BOTH sides need to recognize this, otherwise NO medicine will help after the innocent taxpayers are driven right over the cliff that is getting closer...
A dis-satisfied customer and voter...
Obamanomics, mmm, mmm, mmm. It's OK though cause Barry's gonna pay my mortgage and give me a Chevy Volt.
You really don't believe this crap do you? If you think the Chinese and Indians are going to buy American goods you need help. Most of these folks are broker than we are. What America needs to do is end outsourcing and tariff cheap imports thus bringing back the 20-30 million jobs that were lost. All this is a moot point anyway as the bond market has topped off (300 year highs) and will collapse in the very near future, bringing everything down with it. KKR is now packaging their long term bond risk into new security packages that they now want to foist on the general public. When the big guys want to let Joe Sixpack in you know the party's over. Folks watch out!!!!!
The chickens have come home to roost; the fat lady has sung; payback is hell. Any number of proverbial sayings work here. We can forget 'growth' or anything ressembling what has come to be known as growth. We like 'infinite' champagne on a 'finite' beer budget. Forget about energy independence, forget about the land of happy motoring going on forever. It cannot and will not happen.
Reality is the new world order. And that reality is severe compressive contraction; the economy will contract to a level of activity that REAL energy and REAL natural resources and REAL wealth will support. That level is much much much lower than the pretend debt driven hayday we have known.
It is neither good nor bad; it just is.
"It boils down to this: The government needs to find ways to encourage businesses to cater to wealthy consumers at home and the newly wealthy overseas. And by boosting the price competitiveness of exports, a weaker dollar will contribute to this."
Change dollar to yuan and you have China's trade strategy circa 1990. How the worm has turned.
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