U.S. Dollar's Overvaluation Drives Trade Deficit, Fiscal Deficit

The article discusses the potential decline of the U.S. dollar and its implications for the global economy. The author begins by clarifying that while they are not a doomsayer, they acknowledge the possibility of the dollar's demise. The U.S. GDP per capita is approximately $85,000, making it the highest in the world, but this figure is distorted by the strength of the dollar. The author compares the U.S. to Japan, where the GDP per capita is $34,000, and argues that the U.S. is not 2.4 times richer than Japan. The author suggests that the dollar is overvalued, leading to a trade deficit and a reliance on financial engineering to maintain its status as the global reserve currency.

The author argues that the U.S. needs to borrow money from the world and therefore needs high interest rates to pull dollars back in to buy U.S. bonds. This system requires the world to swap one U.S. dollar for another, ultimately leading to a trade deficit and a reliance on financial engineering. The author suggests that the U.S. cannot maintain a 2.5x GDP gap with an equivalently advanced economy by financial engineering alone. The gap has to close, and the author uses the USD/JPY chart to illustrate this point. The author argues that if the dollar were weaker, the GDP per capita numbers would look more similar, but this would also lead to inflation and a loss of the ability to borrow from the world to fund fiscal deficits.

The author concludes that the fundamental problem is runaway fiscal deficits, which are the driver of the whole thing. The author suggests that comparatively rich countries should have comparatively similar per capita GDP, unless currencies are out of whack. The author then shifts the focus to how to make money from this situation. The author suggests buying Japanese ADRs of big caps listed on U.S. exchanges, as this is a contrarian play that can provide a hedge against a weak dollar. The author argues that this is a solid investment, as Warren Buffett owns about 10% of Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. The author concludes that adding great companies with a weak-dollar kicker that pay dividends is a good way to diversify your portfolio and add a hedge.