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Amidst all the gloomy news coming out from the US economy, the one silver lining has been the uptick that its exports have been demonstrating for the past few weeks. This is mainly attributable to the plunge in the dollar against most world currencies, rendering exports more competitive. Given the recency of this phenomenon, its hard to predict if this is a trend or a mere blip. But, given the fact that the Fed has been working the currency printing presses overtime, the dollar’s value is certainly not heading back north any time soon. On the other hand, rising commodity prices, coupled with the reduction in purchasing power of the dollar is also causing inflation to rise to uncomfortable levels. And with GDP growth also dramatically slowing down, we have the makings of a classic “stagflation”, believed to be a nightmare for central banks for the following reason.
One of the primary levers that central banks use to steer the economy through peaks and troughs is through the control of money supply. In periods of low growth, they increase the money supply to incentivize consumers to save less and spend more and in periods of high inflation, they squeeze the money supply and increase interest rates to disincentivize spending and incentivize saving. So, there is always the tradeoff between containing inflation and perking growth. However, stagflation is a unique situation where inflation is already high or showing signs of rising further and yet growth is tapering or dipping - a nightmare for any monetary policymaker. However, in this case I posit that one could in fact make the case that it could be a blessing in disguise.
As I have written before, in my opinion the root cause for the problems plaguing the world’s largest economy is that it is consuming far in excess of what its current and future incomes justfiably allow it to. And unless this propensity is at least moderated, if not reveresed, it is just postponing impending trouble. Therefore, I would argue that the current combination of a weak dollar and economic stagnation may just be the bitter medicine that Uncle Sam may have to swallow for the sins committed in the past. The weak dollar and consequent export growth will boost its national income, while stagflation means a moderation (or reduction) in consumption (that appears unresponsive to expanding money supply). If not anything else, it will at least balance out the two sides of the equation a bit and force the US to start learning to live within its means.