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The New Hidden Tax


Source:  Barchart

Source: Barchart

Lost in the news of the surging US stock market is the concurrent weakness of the US dollar. This US Treasury Secretary Steven Mnuchin endorsed the dollar's decline at the World Economic Forum in Davos, sending it down further.

Ray Dalio, founder, chairman, and chief investment officer of the world's largest hedge fund, Bridgewater Associates, had this to say about the declining dollar:

Regarding Treasury Secretary Mnuchin’s comments about the administration’s weak dollar policy, I want to make sure that you understand what having currency weakness means—most importantly, it is a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities.

More precisely, a weak currency:

1. Reduces the currency holder’s buying power in the rest of the world (e.g. dollar weakness reduces Americans’ buying power relative to foreigners’ buying power)

2. Devalues the debt denominated in the weakening currency, which hurts the foreign holder of that debt

3. Supports prices of assets denominated in that currency (because of the currency weakness), giving the illusion of increasing wealth

4. Raises a country’s inflation rate

5. Stimulates domestic activity

None of this is what the U.S. economy needs now.


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