David Malpass, President of Encima Global LLC, wrote an excellent Op-Ed in the Wall Street Journal that should be required reading for anyone interested in financial and currency markets. Although equity markets are rallying, so much of the rally disappears when you value equity markets in a non-dollar basis. In fact, the assault on the dollar that started in the Bush Administration and continues in the current Obama Administration can be seen clearly when you look at the S&P 500 in terms of Euros. When taking out the effect of the weakened dollar, the U.S. economy appears much worse off than at first glance.
If stocks double but the dollar loses half its value, who beyond Wall Street are the winners and losers? There’s been a clear demonstration this decade. The S&P nearly doubled from 2003 through 2007. Those who borrowed to buy won big-time. Rich people got richer, seeing their equity bottom line double. At the same time, the dollar’s value was cut nearly in half versus the euro and other stable measures. Capital fled, undercutting job growth. Rent, gasoline and food prices rose more than wages.
Equity gains provide cold comfort when currencies crash. From the euro perspective, the S&P peaked at 1700 in 2000, finally reattained 1100 in the 2007 bubble, fell below 600 in March and now stands at 700 (see nearby chart). With most of the market capitalization of U.S. stocks held by Americans, the dollar devaluation has caused a massive decline in the U.S. share of global wealth.
Measured in euros (a more stable ruler than the ever-weakening dollar), U.S. real per capita GDP is down 25% since 2000, while Germany’s is up 4% and tops ours.
The recent rally that has lifted the S&P 500 index more than 60% from the bottom in March in dollar terms is actually more like a 16.6% return when valued in the more stable Euro. Surely, a 16% rally in 7-months is a welcome event, but a far cry from the understanding that most market observers have obtained.
In his Op-Ed, Malpass discusses some historical context where countries have devalued their currency, and he recommends a course of action for the future. We highly recommend reading this piece, which does not require a subscription.
Malpass in WSJ: Devaluing Currency Has Never Led to Prosperity
