Gold Soars, Dollar Sinks After US Treasury Praises Weaker Dollar

The US dollar continued its plunge today after US Treasury Secretary said a weaker dollar was good for trade.

The US dollar continued its slide with its worst day since last March when Treasury secretary Steven Mnuchin stated a Weak Dollar is Good for Trade.

Mnuchin made the comment in Davos, Switzerland Wednesday morning to news reporters attending the World Economic Forum. The dollar index, reflecting the dollar's value against a basket of currencies, tumbled 1 percent to about 89.25.

Mnuchin's comments echo statements by President Donald Trump, who famously helped turn a market trend of a stronger dollar last January when he said, prior to his inauguration, that the dollar was "too strong" and that U.S. companies can't compete because of it, particularly against the Chinese. The dollar index has lost more than 10 percent since then, and after Mnuchin's comment Wednesday morning, it sank to the lowest level since December 2014.

"Obviously a weaker dollar is good for us as it relates to trade and opportunities," Mnuchin told reporters, according to Bloomberg, adding that the currency's short-term value is "not a concern of ours at all." Mnuchin speaks on a panel in Davos Wednesday morning, at 11 a.m. CET.

He Didn't Say What He Said

Commerce Secretary Wilbur Ross provides the amusing quote of the day regarding Steve Mnuchin's statements.

"I was there with Steve when he said what he said. And I don't think that's exactly what he said."

See the above link for a CNBC video.

This reminds me of the famous Yogi Berra quote, "I never said most of the things I said."

Empty Feedbag Blues

I was looking for a YouTube video were Mr. Ed said "Now Willllburrrrr" but I liked the "Feedbag Blues" song better.

CNBC reports "The markets will be watching for Mnuchin to clarify his comments when he appears in a panel at the World Economic Forum in Davos, Switzerland early Thursday."

Gee, I can hardly wait for empty "feedback".

​Feedback from Gold

Gold, not lame comments from CNBC, Wilbur Ross, and Steven Mnuchin provide all the feedback you need.

The irony in all of these ridiculous comments by Ross and Mnuchin is that a cheaper dollar will not do anything to solve the US trade imbalance.

The problem is not the dollar, nor is it US trade policy. In fact, Trump's trade policy makes matters worse.

Explaining Balance of Trade

The seeds of trade imbalances were sewn in 1971 when Nixon closed the gold window. The trade deficit rose, then skyrocketed.

Few know the true source of the US trade imbalance with China and Mexico.

To understand the futility of Trump's new tariffs on solar panels and washing machines, please see New Phase in "America First" Trade Policy.

Mike "Mish" Shedlock

Comments (25)
No. 1-25
FelixMish
FelixMish

I've never understood this idea you can lower the value of a chunk of money and then you're more competitive.

If I've been selling widgets to people at a hundred bucks a pop, and suddenly 100 bucks is worth 50 bucks relative to most things, I'd not want to screw myself over. I'd crank my price up to 200 bucks and figure to do about the same business in "most things" terms. Waste of time, all that price-tag changing. If that drop in the value of bucks were good for me, then why would I need somebody in Wash. D.C. to tell me? I'd have already dropped my price to 50 bucks without their help.

If, on the other hand, I were buying widgets and I could send the seller 50 bucks for a widget, while stuffing the package with newspaper to make it look like 100 bucks. ... Well. The widget seller might have a problem with me doing this. So how is it fair for me to point to someone in Wash D.C. and say, "Hey. He stuffed the payment envelope. Don't blame me!"?

But, I may be missing something here.

channelstuffing
channelstuffing

soaring deficits,soaring inflation forcing DC into defcon 1to get in front of tsunami of red ink,that's right any fool with a ged can see munchkin telegraphing......NIRP/QE4 ,

AWC
AWC

In a word, devaluation. It’s what governments do to cover over the debt binge created to make them and their cronies wealthy. See, they all position themselves before they hit “print.” Got tangibles? They do.

hmk
hmk

Can these morons really be that stupid? I am hoping its just political posturing because of Chinese currency manipulation. According to theory the currency manipulators eventually pay a dear price for it but it never seems to come back to roost in China.

thimk
thimk

OK , but at a more granular level , mr mish , how did abandoning the gold standard cause the US to import more than they exported ?. thanks

truthseeker
truthseeker

Mish I have said before that I agree with you on what happened when we completely stopped using the gold standard as a discipline for so many things all related to deficits and debt.Since the dollar is even now still for a while longer the world’s reserve currency, we have been able to run up trillion dollar deficits allowing us to live way beyond our means for all these years, but it’s so out of hand at this point to suggest some kind of worldwide currency restructuring with gold and or other commodities This was even talked about even 25~30 years ago. You know Mish I often have asked u considering the dangerous situation we r in here in America and the whole rest of the world with debt so unbelievable that collapse is certain~ what’s your advice besides buy gold. You might even say “I don’t know”. Economic collapse will most likely lead to war imo. What say you?

Greggg
Greggg

"I've never understood this idea you can lower the value of a chunk of money and then you're more competitive". But it's not money, it's just currency. You gotta go back to the definition of both and compare.

FelixMish
FelixMish

@greggg Sure, "currency" if you please. That word might be misleading, too, as the dough you have in the bank might not be called "currency" by some. More like, if you print enough extra "greenbacks" then you change the "greenback" value of things people value in "greenbacks". Figuring out how many "greenbacks" there are laying around is certainly not easy. Anyway, it is interesting that any single entity can make significant changes to the common understanding of what a "greenback" is worth relative to everything else.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Q: "OK , but at a more granular level , Mish , how did abandoning the gold standard cause the US to import more than they exported ?. thanks"
A: When there was a gold standard, countries lost their gold or hiked interest rates enough to support the currency and stop outflows.

Michael Pettis talked about that a bit here: https://www.themaven.net/mishtalk/economics/hugo-salinas-price-and-michael-pettis-on-the-trade-imbalance-dilemma-XpH1Wei-R0qfqQ-iHHM9iA
Also read the excellent section by Hugo Salinas Price

Realist
Realist

Trump thinks he can “win” a trade war. As a result, his administration is deliberately manipulating the currency lower, bringing in tariffs, threatening to pull out of NAFTA, and talking tough on trade all over the world. The trade war has already begun. I suspect it will gather momentum this year. A few companies and individuals may benefit, but 99.9% of Americans will lose.

KidHorn
KidHorn

Currency prices are not set by government mandates. They're set by supply/demand just like everything else. When there's less demand for USD, it drops in value. When there's more demand, it goes up. Governments can buy/sell their currencies to temporarily change the prices, but the US does not do that.

Kinuachdrach
Kinuachdrach

A: When there was a gold standard, countries lost their gold or hiked interest rates enough to support the currency and stop outflows.

Kinuachdrach
Kinuachdrach

Don't know about that, Mish. Whether there is a Gold Standard or not, simple theory suggests that currencies should re-adjust to result in balanced trade, at least over a period of time. The observed fact that the US has been able to run a trade deficit for so long suggests there are other forces at work, and the simple theory is too simplified.

Kinuachdrach
Kinuachdrach

As to the causes of the trade imbalance, remember something else happened around about the same time as the US went off the Gold Standard -- the creation of the Environmental Protection Agency and the subsequent explosion in regulations of all kinds. Arguably, the self-imposed burden of well-meaning but over-intrusive regulation which drove so much industry out of the US (and, to a lesser extent, out of Europe too).

Kinuachdrach
Kinuachdrach

So, at the end of several decades, US consumers have benefited from cheaper imports from China. Some of those same consumers & their communities have been harmed by the loss of jobs. The US is left with a hollowed out industrial base; China is left with a debt which the US will never repay, and the world's best industrial base. Makes one wonder what future ramifications will be.

Carl_R
Carl_R

"The observed fact that the US has been able to run a trade deficit for so long suggests there are other forces at work, and the simple theory is too simplified." The answer to this question is fairly straightforward. Two factors are at work in the long term trade deficits. The first is that in many cases the US does export something to offset the trade deficit, that being USD. If someone in, say Venezuela, buys USD because he prefers to hold USD than his native currency, those exported dollars help offset goods purchased overseas by the US. The second factor is the new willingness by foreign countries such as China to leave their trade profits in the US. If they exchanged the profits back to their native currency, the natural self-correction would take place, with Chinese currency rising and the USD falling until the trade deficit went away. Since, rather than enjoying the prosperity that could come from the trade surplus (i.e. a rising currency and an improved standard of living), they are content to defer those gains, and instead buy the US a bit at a time, the trade deficit is not corrected, and is allowed to continue. In the short run we enjoy a high standard of living from cheap Chinese goods, and the Chinese enjoy a low standard of living from the low exchange rate, but in time this policy will result is some to-be-determined ramifications.

Wrldtrst
Wrldtrst

"simple theory suggests that currencies should re-adjust to result in balanced trade, at least over a period of time." SIMPLE AND FALSE!
The observed fact that the US has been able to run a trade deficit for so long suggests there are other forces at work, and the simple theory is too simplified. YES, IT DOES!

KidHorn
KidHorn

The reason we've been able to have a trade deficit for decades is the countries we have deficits with buy our debt securities. If you include debt securities in the trade calculation, we don't have a trade deficit.

WildBull
WildBull

We have a trade deficit because the government wants a trade deficit. Governments that hold dollars have little else available to them but US bonds. This funds the welfare/ warfare state. The only way to keep up the appearance that all the giveaways are a net positive is to run a deficit. Without ever increasing foreign debt, this would not be possible. The rats in the Capitol LOVE their extra $600 billion or so annual vote buying power. They simply refuse to see beyond the next election cycle. Believing that this is not planned is as silly as believing that the federal government can't find a single one of the 20 Million or so illegal aliens in this country. HA!

FlyOver_Country
FlyOver_Country

For every trade deficit there has to be an equal trade surplus. While the US has run a trade deficit longer than it should, China and Germany have run trade surpluses longer than they should have also. Until Germany and China change policy to help reverse the flow of trade, there will have to be countries that run trade deficits. Simple as.

RonJ
RonJ

Wilbur knows that a sinking dollar is not a strong dollar policy. There was a similar Snow job under president Bush, as the dollar sank.

Kinuachdrach
Kinuachdrach

Is the unsustainable US trade deficit a consequence of going off the Gold Standard? Personally, I suspect that decades of ever-increasing regulations and feckless US trade policies played a role in the deficit. But would going back onto the Gold Standard help?

There are obvious problems with fiat currencies controlled by a foolish Political Class. But currencies based on limited-supply precious metals have their own issues. A good demonstration of this was the 19th Century Opium Wars, where the doughty English waged wars to enslave Chinese people to opium – incidentally, shortly before the US fought a civil war to free the slaves.

Issue was that the English wanted lots of goods from China – tea, silks, spices – but the Chinese had no need for English goods and would accept only silver in exchange. The British Empire began to run low on silver, leaving the English with two choices – (A) live without imported Chinese goods, or (B) create a market in China for an English-supplied good. They went with Plan B.

The English began to export opium grown in British-controlled India to China. The Chinese Emperor did not appreciate having his people turned into drug addicts, and prohibited the import of opium. The English then invaded China (twice!) to force the Emperor to see the error of his ways.

Bottom line lesson from history is that trade imbalances can be dangerous things – even without fiat currencies.

GiT
GiT

Devalueing the currency is a way of making people poorer. Raw materials and all imported goods increase to maintain their real value, while wages, pensions and savings loose value. Lower consumption counteracts price increases, so inflationary effects may be subdued.