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Some provocative thoughts fron Gavekal
It is tempting to interpret the flight from the US$ in financial markets as the clearest, most objective indicator of America’s relative decline. Europe has long been derided as an ageing, rigid continent, doomed to irrelevance in a world dominated by America and Asia. But could it actually be America, not Europe, that is failing to compete in the globalised world economy and is now threatened with long-term decline?
As the US$ keeps falling, this is the story we are starting to hear from our perma-bear friends. Sadly, for those of us who live in Britain and Europe and would like to believe that the strength of our currencies reflects our superlative economic prospects, the answer is an emphatic “No”. There was a time in the 19th Century when the strength of Sterling reflected Britain’s unparalleled prosperity and imperial power.
But since the deregulation of currencies and financial markets in the 1980s and 1990s, currency strength has conveyed almost no information about the health of a national economy - and none at all about a country’s competitive position in global trade (see What Investors Need to Know About the US Current Account Deficit). Anyone who believes that the falling US$ reflects America’s huge trade deficit should consider that the one major currency which has been even weaker than the US$ in the past 3 years has been the Yen; Yet Japan is the world’s greatest creditor nation, with the biggest trade surplus the world has ever seen (while the strongest currencies, namely the AU$ & NZ$ sport sizeable trade deficits).
Link to Gavekal's website
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