A colleague of mine, Jon, posed an interesting question on why it is that bad news today for the US economy (worst existing home sales number since ’99) could be good for the US dollar.
Recall now the long-awaited death of the American consumer. Consumer spending has accounted for two-thirds or more of our economic growth and also for our huge trade deficit (as Americans have kept on partying like it’s 1999 and importing more than we export). Much of that spending has come in the form of Mortgage Equity Withdrawal (MEW) as Americans have treated their homes like an ATM. That works only as long as prices keep going up. But now we all know that has reversed.
The only surefire way throughout economic history to cure a trade deficit is a good recession. So if the housing numbers keep proving worse than expected and markets hear the death knell of the American consumer, is that necessarily bad for the US dollar?
Consider that if we cut our consumption drastically, imports will go way down and possibly dip below exports, correcting our trade balance. If the same amount of investment keeps coming in to the US because investors seek the safe haven of the US during a global slowdown, then the dollar would gain value.
Throughout the economic boom of the past 5 years the US dollar has been dropping, and perhaps throughout a recession we’ll see it rise. Take a moment to think beyond the talking heads on the news and consider that one can’t have it both ways: One can’t just say about the dollar that good news is bad news and bad news is bad news.