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[Oluti]

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.

 

[lioralace]

Every trader and investor should take into account the nuanced viewpoint provided by your analysis of the current rally in the U.S. dollar amid medium-to-long-term economic factors. Although the dollar's recent upward momentum is encouraging, it's important to understand the underlying factors that could lead to a widening gap in future economic outcomes.

The intricate relationship between government spending and protectionist trade policies is one of the main issues you bring up. Increased government spending appears to boost economic growth by increasing demand and introducing liquidity. These conflicting forces, however, produce uncertainty when combined with trade restrictions and tariffs that lower net exports. This discrepancy affects GDP growth estimates, leading to a division between cautious estimates that take declining exports into account and more optimistic projections driven by domestic spending.
Your discussion of the multiplier effect is essential to comprehending how these dynamics affect the economy as a whole. Increased consumer spending from more employed people drives money through different sectors, supporting growth. However, wage disparity causes the benefits of this multiplier to be distributed unevenly, a fact that is frequently ignored in discussions of mainstream economics.

Even with historically low unemployment, many workers make wages that are insufficient to pay for necessities like housing, food, and transportation. Because of this wage depression, even though employment is high, a significant portion of the population still has limited consumer spending power. Because it depends on broad-based income growth rather than just employment numbers, the multiplier effect is therefore fragile even though it is positive.
It's revealing that the current unemployment rate of about 4.1% is lower than the more historically "normal" rate of 5%. It implies that the economy is operating hotter than normal and has less capacity to withstand shocks. Risks could increase as a result of this overheating, particularly if the labor market worsens or wage growth slows.

This situation is made more difficult by trade tariffs, which threaten job losses and lower economic efficiency. While protectionist policies may temporarily save some domestic jobs, they can also result in increased costs for businesses and consumers as well as retaliatory tariffs from trading partners. The advantages of government spending may be offset by this deadweight loss to the economy, which can also weaken the multiplier effect and raise unemployment.
Further hazards include tighter credit requirements and growing interest rates. Businesses and consumers may reduce investment and spending as borrowing costs rise, which could lead to a slowdown. The multiplier effect would be severely impacted by this contraction, particularly given that it is already exacerbated by low wages and little unemployment slack.

In conclusion, the current optimism is reflected in the dollar's rally, but competing economic forces cloud the medium-to-long-term outlook. The vulnerabilities brought about by trade tensions, tightening financial conditions, and wage inequality must be taken into account by both investors and policymakers. Because the multiplier effect is leveraged, any negative shocks could have disproportionate effects on employment and growth.