Publications: Notes at the Margin

The Consequences of Political Incompetence (July 27, 2020)

 

Confidence is essential to maintain stable prices or exchange rates. Forty-two years ago, the world lost faith in the US dollar during the Carter presidency. The exchange rate to the German mark fell thirty percent. Its restoration required drastic measures, including higher interest rates. The US economy was thrust into a recession.

 

Confidence in the United States today appears to be waning again. The Trump administration may face a Carter-like decline in the dollar exchange rate—or worse. Defense of the dollar would exacerbate the recession and cut oil use. To pile it on for global oil producers, if an exchange-rate-related oil price rise occurs and is large enough to offset the dollar’s decline, this would prompt renewed drilling in the United States.

 

Those who think the oil market’s nadir came in April 2020 may need to rethink their assessment. The incompetence in Washington, DC, may make things far more challenging.

 

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