Is the Dow Jones up, down or still irrelevant in the face of all of the trade wars that we have seen lately? Well, the simple answer is yes. Yet, it is more complex than that. The Dow Jones industrial average has been a mainstay of global trade for decades now. However, as you know, the U.S. Dollar has continued to rise and the Euro has continued to plunge, leading to inflation in many countries. Meanwhile, commodities have taken a beating, with the prices of oil and other minerals that were very cheap before, are now very expensive.
In fact, it is a long term trend that has been going on for quite some time now, but the U.S. dollar and its strength, which were much too strong, have been a major cause of trouble. However, the great thing about the U.S. Dollar is that it can be strengthened or weakened. It can also be traded in the open market, which means that there is no central bank backing it, as with other currencies. Indeed, many say that the U.S. Dollar has already lost its credibility and strength as a global currency.
One commentator by the name of John Navarro recently wrote a book about this issue called, “The Trade Wars Still Matter, Navarro 180 Shows That It Matters (He Could Be Right), in which he discussed his views about what has gone wrong in the world and about what can be done to avoid such things from happening again. He discusses why the U.S. dollar was strong, how and why it has been weakened, and discusses what the next big challenge will be. He does a great job of summarizing much of what has been written on the subject over the past few years and makes his own predictions about where things will go from here. He also makes a case for protecting the middle class by investing in the stock market.
However, he also makes the case that the current bubble is nearing a bust and that the next wave of trade wars that will erupt, just like the last one, will not help the average American worker. However, the bubble will burst, and it will become much less attractive to businesses. As the U.S. Dollar becomes less appealing, they will start shifting their spending patterns from the U.S. Dollar to other currencies.
Then, if the United States government does not step in and provide stimulus programs, the dollar will collapse and businesses will shift their spending patterns to other currencies. The result will be a huge supply shock to the U.S. Dollar. This is the theory, anyway. So, the question remains, will the Obama Administration do anything about it?
Will Navarro’s theory become reality or not? In my opinion, that depends on the Obama Administration. If the U.S. Federal Reserve continues to hold interest rates near zero and raise them when it deems necessary, then it is possible that Navarro could be right, and that the dollar will continue to devalue further, causing inflation to take hold.
On the other hand, if the U.S. Federal Reserve steps in with aggressive interest rate policy, then Navarro may be on to something. In fact, I see a huge problem that lies between the two possibilities and that is if the Fed just increases interest rates again, causing inflation to rise further, the stock market to crash and the unemployment rate to skyrocket.
With both possibilities, the Federal Reserve could risk a chain reaction that would put us right back where we started. In other words, it could cause inflation to explode or bring our economic growth to a screeching halt.
That is why Navarro is urging the Federal Reserve to stop holding rates near zero and work to stimulate the economy, which could lead to deflation, higher unemployment and economic stagnation. if it is allowed to continue.