The U.S. dollar index is at its lowest since 2014, fluctuating between 88 and 89 . It began its fall in early 2017 from a high of 102. Similarly, in the past year, the 10-year Treasury bond’s yield has risen 50 basis points, from 2.4% in early 2017 to around 2.9% . Yet, some might argue that in the past, the dollar has been weaker, yields have been higher, and that comparatively these trends are not a cause for alarm.
To put things into perspective, one has to look at how long it took the U.S. federal funds rate to get to the 1.42% it is today . In 2009, in the midst of the Great Recession, it was hovering just above zero at around 0.15%, or 15 basis points. It has taken nearly ten years to get to the rate where it is today in 2018. Looking at the historical trends for the federal funds rate, there isn’t much of a difference between a 100 basis point rise, from 0% to 1%. Compare the change to that in the period between 2000-2002, when the Federal Reserve cut interest rates 500 basis points, from 6% to 1% to counter the effects of the imploding tech stock bubble, and to stabilize the U.S. economy. In that period, 1% interest rates signaled a weak economy. Under that logic, why would 1% today signal a strengthening economy? In that light, it may also seem fit to examine the ominous parallels between the fundamentals underlying the transition from 1987 into the nineties, and present economic conditions.
In 1987, the dollar tanked from an all-time high of 164.72 in February of 1985. Ten-year treasury yields peaked that month for the year at around 8.7%. Fiscally, the United States was transitioning from a creditor nation to a debtor nation. It was running large budget and trade deficits. The personal savings rate for the average American tanked to 3.8%, an all-time low at the time.
Fast forward to 2018. Congress’s latest bipartisan vote approved an increase in spending to $300 billion over 2 years. Simultaneously, Trump delivered tax cuts of $1.5 trillion . These policy decisions are happening at a time where as a nation, we are running record-high trade and budget deficits.
Is there a difference between 2018 and 1987? In 1987, foreigners were still buying our bonds , and the federal funds rate in 1987 was around 6%, which meant that the U.S. could afford to pay higher interest on their bonds. Remember how long it took to get to the current rate of 1.5%? It seems that the times have certainly changed thirty years later.
To add to growing worries, last month, Chinese officials announced the potential of slowing down or halting the buying of U.S. treasuries . If China does decide to stop buying treasury bonds, how will the twin deficits be financed? It’s even less feasible at this point in time, when the Federal Reserve is preparing to undergo quantitative tightening. The selling of treasuries from the Fed’s balance sheet is going to add substantially to the already growing pile of bonds for sale .
Fundamentals are much worse now than they were in 1987. Now, the savings rate is at a ten-year low, at 2.4% , which was much lower than the bottom in 1987. Consumer debt, including credit card debt and student loan debt are at all-time highs. In addition, the economy as a whole has changed drastically since 1987. Back in the eighties, manufacturing played a larger role in the U.S. economy. The United States exported more. Compare that to today, where the economy is mostly service based, the majority of new jobs are of part-time, low wage variety, and a staggering number of 95 million Americans are not participating in the workforce .
While it may seem like unnecessary gloom and doom, it does warrant another look. It is probable that a weak dollar, higher yields on the 10-year treasury, and stalling rate hikes are reflections of a weakening U.S. economy.
 U.S. Dollar Index – 43 Year Historical Chart, macrotrends.net
 US 10-YR, cnbc.com
 Effective Federal Funds Rate, fred.stlouisfed.org
 Dollar Under Siege With U.S. Deficits Back on Wall Street’s Radar, bloomberg.com
 Nine Myths About the Crash, mises.org
 China Weighs Slowing or Halting Purchases of U.S. Treasuries, bloomberg.com
 Raising Rates Reflect Bigger Debt Not Faster Growth, europac.com
 Personal Savings Rate, fred.stlouisfed.org
 Labor Force Statistics from the Current Population Survey, data.bls.gov