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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