In spite of my frequently bearish prognostications on individual companies, I tend to be an optimist when it comes to the overall economy. In fact, my concerns for 2007 mark the first time I've ever actively worried about an entire year in general. It just seems that, unfortunately, there's simply too much lining up against 2007 for it to be anywhere nearly as successful as 2006.
Start at the top
My concerns start with the most influential person in the U.S. economy, Ben Bernanke. As the chairman of the Federal Reserve, Bernanke is tasked as this country's chief inflation fighter. Yet in a recent speech in China, he called upon the Chinese to let its currency, the yuan, appreciate against the dollar. If ever there were a policy that, if implemented, would guarantee inflation, that's it.
The reason why U.S. policymakers are concerned about the weak yuan is that it helps drive China's export economy. In essence, the weaker the yuan, the stronger the purchasing power of the dollars in your pocket when it comes to buying Chinese-made goods. Since in many cases, China is the low-cost provider of goods to America, China could (and likely would) raise prices in dollar terms to maintain a stable influx of yuan. The textbook definition of inflation is having to pay more for any given product. By encouraging a stronger yuan, Ben Bernanke -- the U.S.'s chief inflation fighter -- is actively pursuing higher inflation.
Trickle-down ugliness
Additionally, by encouraging the yuan to strengthen, Bernanke is by default calling on the U.S. dollar to weaken. A weakening dollar makes dollar-denominated debt more expensive for foreigners to hold. That, in turn, forces U.S. interest rates to rise to encourage people to pick up otherwise less attractive debt. Higher interest rates mean higher debt service costs, which discourages borrowing to invest. That makes expanding a business -- and in the aggregate, the economy -- more expensive and tougher to do.
In a nutshell, by trying to weaken the dollar, Bernanke is ushering in higher inflation, higher interest rates, and lower real economic growth. In a word: stagflation.
The good news (of sorts)
Of course, not every company will suffer. Oil companies, in particular, stand to benefit. After all, oil prices are set on a world market, in dollar terms. The weaker the dollar, the easier it is for people in other countries to pay high dollar prices for oil, thereby helping to support high oil prices. Particularly telling is this chart. It compares ExxonMobil (NYSE:XOM), ChevronTexaco (NYSE:CVX), and ConocoPhillips (NYSE:COP) to the Crude Oil Tracking Index ETN (NYSE:OIL), an ETF that tracks oil prices. Ordinarily, you'd expect oil companies to trade in line with oil prices, given that the companies' fortunes are bound to the value of what they can extract and sell. That the oil companies have moved higher while oil has moved lower indicates to me that the market is expecting oil prices to rebound, consistent with stagflation.
Another company that should be able to successfully navigate through the upcoming turbulence is Microsoft (NASDAQ:MSFT). With strong global operations, a weak dollar translates directly to a larger paycheck for every copy of Windows sold overseas.
Invest globally
All told, I think a weaker dollar and the resulting inflationary pressures are going to make 2007 a difficult year for American consumers. Yet thanks to an emerging global middle class, the rest of the world may very well fare better. If you're ever going to consider investing internationally, 2007 looks like the perfect opportunity to do so. To get started, take the next 30 days to try out Motley Fool Global Gains for free. You've got nothing to lose but your time, and you may just find out how to protect yourself from economic problems at home. Click here to get started.
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At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft, an Inside Value recommendation. The Fool has a disclosure policy.
