Although this week may have been a good rally week for the dollar, the medium-to-long run factors could divide a solid base of fundamental strength. The number one factor stemming from the employment situation. Due to some favorable economic news overall, an increase in interest rates, and geopolitical stability with a campaign in Syria, things are currently looking up for dollar bulls, but something worth pointing out are the multiplier effects able to contort the U.S. and world economies in the medium-to-long run.
In a previous article, "Mixed Signals For The U.S. Dollar" , I had pointed out some visible disparities for policy making, pointing to choppy trading for the dollar in February and March of this year.
This disparity in policy making can be seen clearly with increased government spending, versus a protectionist stance in trade. On one hand, the economy gains from increased government expenditures; but, on the other hand, the economy suffers a loss from decreases in net exports.
Well, in this article, I argue that these disparities will result in a dramatic divergence in calculating overall averages for GDP growth. When I say dramatic divergence, I do mean an extreme divide! The cause of this extreme divide, I argue, will fast become visible due to the positive and negative forces arising from the so-called multiplier effects in the economy. This divide will definitely bite into what has become a quieted issue of wage disparity in the United States. For instance, the disparity in wages from top paid workers versus the minimum wage earned by most of the labor force.
What's quietly known as a wage depression has been carefully removed from the spotlight for policymakers, with much more attention being placed on the successes of the national economy. For instance, the economy has been touting record low unemployment, strong GDP growth, and the availability of easy money for those earning a fraction of what top wage earners have been making.
Rock-bottom wage earners have thrown a rager of a party for the rich by way of consumer spending, a greater percentage of their disposable income is spent on household goods, food, gas, and other consumer staples. Thus, creating a multiplier effect from lower unemployment rate.
More people are at work, and more people are spending, but the multiplier effect benefits from a higher percentage of laborers employed in the work force, not a greater percentage of individual wage earnings. With the current unemployment rate at a record low 4.1%, this is cause to believe that the U.S. is already accelerating faster than normal, becoming a more leveraged and impactful blow. In other words, the multiplier is at an above-average level already, and is already leveraged to cause damage, given any deteriorating factors in the employment situation.
Factually speaking, prevailing economic research pegs a more normal rate to be coinciding with an unemployment rate nearer to 5%, which is why there's good reason to believe that we are already experiencing a high, positive multiplier already, all else remaining equal.
Trade tariffs won't help this cause either, with job losses and a dead-weight loss to the economy. Wages won't change because of this, everyone should be getting paid no more, but the unemployment rate could tick higher, and the multiplier effect will undoubtedly be effected by all of this. What's more, any kind of rocking of the boat from tighter credit and interest rates could rapidly unhinge what is a leveraged multiplier effect, subsidized by low wage-earners and record low unemployment.
