Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from James about the U.S. dollar’s strength…
Assuming the U.S. has a debt crisis in the not-too-distant future, what currency do you think will rise to the top of the heap?
– James O.
Hi James, that’s a great question. The thing with the U.S. is that even if it has a debt crisis, it would still be considered the safest economy to invest in on a relative basis.
For instance, Europe is a mess right now, so count the euro out of becoming the top currency. The Russian invasion of Ukraine has had an extremely negative effect on European economies. The International Monetary Fund (IMF) estimates that Europe’s output and income will be nearly half a trillion euros lower as compared to pre-war forecasts –showing just how badly the region is suffering from the war.
And while inflation is predicted to decline this year, it will stay above central bank objectives at about 6% and 12%, respectively, in advanced and emerging European economies.
Meanwhile, the United Kingdom is facing a long recession and a decade of lost growth. In November, the Bank of England warned that the U.K. is facing its longest recession since records began. So definitely count the pound out.
Then you have Japan’s economy, which has barely grown since the 1990s. Plus, Japan is the most indebted country in the world as measured by debt-to-gross domestic product (GDP). So, count the yen out.
That leaves the Chinese yuan as a possible contender, but it’s such a small fraction of overall currency flow that it would take forever to reach the top of the heap.
Now, I believe the dollar will weaken this year as the Fed pivots to Stage 2 of this current interest rate cycle, but it will not lose its top spot any time soon, and not in my lifetime.
Similarly, Duane has a question related to the debt ceiling, but she wants to know how to prepare in case of a national emergency…
I’m deeply concerned that the anti-gov’t radicals who have taken the House hostage might lead the nation to hit its debt ceiling and possibly default on its repayments. Should that happen, how might we be hedged, so we can protect our retirement accounts?
I really don’t want to suffer another 2008-2009-style recession or even the generally negative choppiness of 2022! Would love for you to provide some general (or as specific as you can be) advice on what we might do to protect us from the rogue behavior in Congress. Thanks!
– Duane L.
Hi Duane. First of all, thank you so much for your trust in my team here.
Second, there is zero way we will default on our payments. Don’t worry about that. All of this posturing regarding the debt ceiling is at the end of the day just that.
As a reminder, the debt ceiling is a limit on the total amount of money that the federal government is allowed to borrow to fulfill its financial obligations. Just about two weeks ago, The New York Times reported that the U.S. hit its debt ceiling. And still the sky hasn’t fallen, so to speak.
Instead, the Treasury Department asked Congress to raise the debt limit.
So no matter which party is in power over Congress, the result is ultimately the same: the debt ceiling will be raised. For example, since World War II, Congress has had to raise the limit 102 times.
Even so, I share your frustration at the sheer drama and antics of it all. But I believe most of the volatility in 2008-2009 was caused by Wall Street over-leveraging the subprime mortgage market in assets that crashed and burned, for which the big banks were bailed out.
On the other hand, the 2022 turmoil was largely caused by the Fed embarking on the quickest percentage increase of interest rates in our history.
However, we are coming to the very end of this exercise, and the pace and size of hikes will drop moving forward. It has dropped already – to 50 basis points from 75 basis points in December, and to 25 basis points this week, as I mentioned on FOX Business earlier Tuesday.
Finally, our last question this week is from Dana, who wants to know about elected officials’ financial status…
Nomi, do elected members of the U.S. Congress have an obligation to report their financial status every year? Not just their tax returns, but something that reflects their growth in net worth.
We hear the anecdotes from time to time about politician A or politician B amassing a fortune while they were serving in Congress. Would the data show a correlation between time in office and net worth growth?
Of course, it takes money to run for public office, either your own money or supporters’ money. So the data would have to be presented as percentage growth rates in net worth, not millions of dollars of net worth accumulation.
I suspect that the correlation is strongly positive, supporting the arguments presented in some of the comments that private money needs to be drained out of the political election process. And not just the election process, but the ongoing support of any particular elected officials who might proffer a favor on a contributor to his PAC.
– Dana L.
Hi Dana, thanks for writing in. Yes, as stipulated by the Ethics in Government Act of 1978, all members of Congress, senior congressional staff, Cabinet members, the president, vice president, and Supreme Court justices must file annual personal finance reports.
We are going to release a piece on that soon, and about what elected officials are doing with their money. That should be of interest to you and others here. Stay tuned!
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personalized investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins