A Weak Dollar Is Bad For America

Forbes Magazine ^ | 29 October 2007 | Carl Delfeld

[shrinkermd]

Here is my case for why a weaker dollar hurts America.

First, a weaker dollar translates into a cut in the real spending power of American consumers--in effect, a reduction in real income.

Second, a weaker dollar weakens the role of the U.S. dollar as the world's reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining?

Third, the chances of a weaker dollar leading to a sharp reduction in America's trade deficit is highly unlikely since 40% of the current balance is due to oil imports that are denominated in U.S. dollars. An additional 20% is due to trade with China, which is, of course, controlling the value of its own currency.

Fourth, a weaker dollar is inflationary since it increases the cost of imports.

Fifth, business leaders know that discounting prices may bump near-term revenue and profits but at a real cost to long-term profitability, not to mention inflicting damage to the brand name. This is what we are doing to the brand of America by trying to increase exports by lowering their price in the global marketplace. Better to stand firm on price and sell into global markets on the basis of what is great about

Sixth, investors seem to like a weaker dollar since the profits of American multinationals get a boost from foreign earnings being translated into U.S. dollars. Again this is short-term thinking and vastly overstated since most multinationals have sophisticated treasury departments that hedge currency exposures.

[shrinkermd]

Long, interesting article. I excerpted his basic argument only.

[traviskicks]

http://www.house.gov/paul/congrec/congrec2002/cr091002b.htm

[USFRIENDINVICTORIA]

As a Canadian, I’ve experienced first-hand everything but the second point. It’s all true.

The second point (about the reserve currency)never applied to Canada; but, it is probably the most important consideration for the U.S.

For an example of how important it is to have the reserve currency; consider repayment of international debt. If you borrow in your own currency, then you only pay back the same number of dollars; regardless of how low your dollar falls. When we had our debt crisis in Canada, every time our dollar fell; we owed more money — because most of our debt was denominated in U.S. dollars.

[Shermy]

“First, a weaker dollar translates into a cut in the real spending power of American consumers—in effect, a reduction in real income.”

As if that weren’t easily predictable. This is one way Bush’s tax “cut” is being paid for, not with spending cuts but with inflation that takes the money back out of the “cut” recipients’ hand...unless your “cuts” were invested in China...

[LowCountryJoe]

I am glad you posted this because it has such a great title. This is also bound to attract all sorts of FReepers — some who may not even know just what it is in the heck they’re talking about...ought to be fun watching this thread.

[bill1952]

There are many ways that a strong dollar is bad for America.

The whole concept of weak vs strong has both good and bad points equally distributed between them.

Taking just one aspect of the interlinked argument is fallacious in itself.

There are tons of viewpoints from equally respected economists and investment firms that state otherwise, and the only thing that the mice - you - should take away from watching the pissing contest between the big dogs in the tall weeds is this:

There are ways to make money no matter which side is more weighted at the moment.
The trend is your friend, and be glad that, for the moment, it is easy to invest in this country.

When they who shall not be named take over and tax the living hell out of investment and profit, then things will not be so opportune.

[narby]

This is one way Bush’s tax “cut” is being paid for, not with spending cuts but with inflation

Huh?

You know there's this little issue with oil prices right now where we're sending huge volumes of cash outside the country to pay for it. As a separate issue, the rise in fuel prices increases the cost of everything.

Tax cuts have nothing to do with oil prices, while the machinations of Putin and Iran and others do.

[chronic cough 420]

A weaker dollar is a neccessary evil in the new globalized economy. Some skeptics think that the central banks of the world will dissolve their interest in the US dollar, I believe that the decline of the US dollar is going to stop at a point that reflects the size of the American economy. From there our economy and USD only has room to get stronger with our business ties expanding with the NAFTA and CAFTA.

[MeanWestTexan]

“For an example of how important it is to have the reserve currency; consider repayment of international debt. If you borrow in your own currency, then you only pay back the same number of dollars; regardless of how low your dollar falls. When we had our debt crisis in Canada, every time our dollar fell; we owed more money — because most of our debt was denominated in U.S. dollars.”

Not this point — but this concept is the driving force behind this Forbes article.

Loans in dollars are “worth less” upon the devaluation of the dollar -— a fact harmful to banks.

Said banks being the driving force behind Forbes’s consistent “strong dollar” stance.

[Shermy]

“Tax cuts have nothing to do with oil prices, while the machinations of Putin and Iran and others do.”

??? Puny actors compared to the hedge funds.

Tax cuts have lots to do with oil prices - if they aren’t paid for with spending cuts. Remember when Republicans said they wanted balanced budgets and warned of the failures to get them? Well, you’re seeing those failures now.

[LowCountryJoe]

Imagine the USD no longer being the currecy of choice around the globe...why, the Chinese might just have to find another round hole for their square peg. On the other hand, since there is no free lunch, that imported sweet leaf might cost some additional Andrew Jacksons.

[underbyte]

Now that the dollar is so low our exports are cheaper - Let’s see we could export computer technology....No we gave that away....Ford Motor cars?. No nobody wants those...Man I am just drawing a blank on this one.....OOH OOH I know, Cheap Mexican Laborers to mow lawns and Sheetrock houses

There’s the ticket out of this

[expat_panama]

It’s all true.

No it isn't.  

This is Carl Delfeld's case for putting pressure on federal policy makers to have the dollar trade for more foriegn currencies.  That way the foreign stocks he's peddling will be worth more, and his newsletters (chartwelletfadvisor.com chartwellasia.com chartwelladvisor.com) will look better.

An argument can also be made that a weaker dollar will make American exports sell better, as well as bring in more foreign investment funds.

My bottom line building a case either way is only useful for someone with an ulterior motive.  The rest of us have been doing pretty good letting the market set the exchange rate --in other words, lets keep the government's hands off of private citizens' money.

[USFRIENDINVICTORIA]

I completely agree with your point about letting the market determine the exchange rate.

However, a falling dollar indicates something is wrong with the fundamentals. Don’t be lulled into complacency, like we were in Canada for over three decades.

[narby]

Tax cuts have lots to do with oil prices - if they aren’t paid for with spending cuts. Remember when Republicans said they wanted balanced budgets and warned of the failures to get them? Well, you’re seeing those failures now.

Apples and oranges. Rapid shifts in oil prices aren't the result of decades of tax policy that hasn't changed significantly my entire life. They're the result of international politics and the calculation about whether Iran gets a bomb and whether Putin supports them and dozens of other issues.

There are innumerable places that can pump oil all day for a few dollars a bbl. But they demand their price because the world will pay it based on the total production of the world.

If we pay double for fuel, everything that gets moved will get more expensive. It's as simple as that. Domestic US tax policy is insignificant in comparison.

[expat_panama]

...a falling dollar indicates something is wrong with the fundamentals...

Personally, I've always been of the opinion that it's usually the fundamentals that we need to be concerned with.

[bert]

Meanwhile factories are humming, many at near capacity.

[bill1952]

>Said banks being the driving force behind Forbes’s consistent “strong dollar” stance.

Bingo.

"all that we do is done with an eye towards something else."

- aristotle

[flowerplough]

Bad for American (over)consumers, good for American bidnesses & for the eco-freaks who want us to buy less oil and carpool and shiver thru winters?

[NVDave]

I agree, and there’s some fundamental issues concerning the structure of banks, debt, the debt markets, that are causing some of the concern about the USD:

http://www.newyorkfed.org/newsevents/speeches/2007/dud071017.html

NB the following:

“5. nearly a failed Treasury bill auction—total bids were barely sufficient to cover the amount the Treasury was offering. This near-miss occurred despite the fact that money market mutual fund investors were fleeing to rather than away from Treasury securities.”

Reading that this morning made me go “WWWWWTTTTTFFFFF??”

[Turret Gunner A20]

The Heritage Foundation has a reason for the weak dollar

http://www.heritage.org/Press/Commentary/ed110607e.cfm

... and some people aren't going to be very happy to hear it.

It's the U.S. tax code. Heritage says that there are two failings that are causing the long-term weakness of the dollar. First, Americans don't save enough to meet capital investment requirements. And the fact that we consume more than we produce. Both of these exist because of our complicated and asinine tax code.

The Heritage Foundation says that Americans follow the example of government, when it comes to their own savings and spending. But when someone in American actually tries to save and invest ... he is punished with extra taxes. It is a fact that the government taxes income that is saved and invested far more heavily than income that is immediately spent. Taxes on savings and investment weaken the dollar, but they also slow the growth of the private economy. This costs Americans $3 billion every year in lost income and jobs for every $1 billion of revenue yielded to the government. Get this ... the total cost of damages attributed to our hideous tax system is about $2.5 trillion per year. Trillion with a "t." And with Charlie Rangel's grand tax scheme, that number could be kicked up by another $2.9 trillion. That means $2,600 less for every American family every year for the next ten years.

And when it comes to U.S. companies basing their companies abroad, it's a complete no brainer, considering the heavy taxes on the exportation of American-made goods. U.S. companies abroad are more likely to reinvest in their foreign country's economy, because if they bring the money home to reinvest in America ... the government will pound them with taxes.

Is there a solution? I think I know of one ... Hmmmmmm, let me see.

http://boortz.com/nuze/index.html

[Hydroshock]

Economy/Credit/Housing Issue sPing List

If you want on or off this list let me know.

[Travis McGee]

Second, a weaker dollar weakens the role of the U.S. dollar as the world's reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining?

In ten years, we'll be Argentina with nukes.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

~~Ludwig von Mises

[Junior_G]

Short term thinking is all the globalists and free-trade zealots are capable of.

[RSmithOpt]

Dead on target!!!

[Travis McGee]

Very good input. That “small matter” of the dollar’s world reserve currency status cannot be underestimated. Since Bretton Woods, the USA has been like the richest player in a game of Monopoly, with one extra stupendous advantage: we could simply print all the extra “Monopoly dollars” we wanted, and the other players had to accept them on an equal basis with all of the other “Monopoly dollars” already in play. Yes, it devalued the value of everybody’s money, but so what? America always got the first crack at the new thin air money. No other global player could simply issue dollars, and dollars were needed to purchase oil, settle contracts etc.

Once that world reserve currency status is lost, the US dollar won’t mean any more than a Soviet Rubel or Argentine Peso. It will be allowed to drop through the basement as other countries settle contracts in Euros etc.

We could wind up as “Argentina with nukes,” a very dangerous sistuation for ourselves and the world, when we can no longer pay for our global needs in fallen dollars.

[RSmithOpt]

Well a tried and true globalist for sure.

So let me ask you this:

Look at crap like Zimbabwe and think. If the US average wage earner has to compete against socialist dictatorial 'slave' labor countries like Venezuela, and corrupt societies like Mexico, whose average citizen can't even earn enough to feed and cloth his family, what are we going to do as a country in those respects? Become like them?

[dennisw]

From there our economy and USD only has room to get stronger with our business ties expanding with the NAFTA and CAFTA.

NAFTA aand CAFTA doesn't help us at all. Imports from China and oil/energy imoports have a much larger impact

I guess you never noticed all those NAFTA factories moving to China

[sbMKE]

Loans in dollars are “worth less” upon the devaluation of the dollar -— a fact harmful to banks.

I often wonder if this weakening dollar and inflation isn't in some ways a good thing for consumers (me) on certain levels.

Will folks with fixed rate mortgages, student loans, non-revolving loans at some point find themselves in good shakes? Sure, real estate isn't appreciating anymore in many places, but will we at some point look back at $200,000 mortgages the way I look at my parents and neighbors in their $15,000 (in 1970-80's pricing)houses.

It just seems to me in some ways that a weaker dollar may help folks as $100k in 2006 mortgage dollars is already worth significantly less in real buying power. Assuming that wages at some point start moving up to keep pace with inflation, that 100k balance stays the same, but gets more affordable as time goes on.

Perhaps a freeper in a "$15,000" house can tell me where I'm wrong here.

[underbyte]

“””Assuming that wages at some point start moving up to keep pace with inflation, that 100k balance stays the same, but gets more affordable as time goes on”””

That’s the concern that I have. I am paying $5 for 5 apples at my local market. Wages are not keeping up with inflation (maybe due to 20 million illegals willing to work for 1/3 the going rate is depressing everybody else’s wages?)

If wages don’t go up Bernake really exacerbated the problem on this one.

More people will be marginalized on their mortgage payments by increased fuel/heating/food & essentials. Instead of socializing the financial solution he should have let the banks investors bite the bullet on this one.

[USFRIENDINVICTORIA]

IMHO, you’re right on all counts. I really like your Monopoly simile — I think I’ll borrow it for future use.

[Travis McGee]

Thanks, I think that Monopoly banker/player analogy is one of my best.

[dennisw]

You should have heard the Bilderberger guy on Coast to Coast last night. He wrote a book about them. He says the TriLateral Commiiosn and CFR are the minor leaugues for the Bilderbergers. Alex Jones was on too and he made a lot of sense-— at least last night

http://www.danielestulin.com/?idioma=en

[Neidermeyer]

A good dose of common sense from the repub candidates would get this reversed in a few short years,,, ok’ing oil drilling and refinery construction ,, going nuclear for electric generation , cancelling ethanol as it JUST DOESN’T WORK and reforming the tax code to bring industry back,, The FairTax is best for that...

[Travis McGee]

How can we join that bilderberger club? LOL.

[AndyJackson]

Second, a weaker dollar weakens the role of the U.S. dollar as the world's reserve currency.

I think this is actually a very good thing. There is an enormous structural imbalance in the US economy that is the result of people giving, loaning, and investing money in the US because it is the reserve currency. Over the 60 years since the end of WWII, the imbalances have added up to the point where major restructuring is required to make us competitive.

Borrowing to consume, inflating the currency to consume, the incredibly costly, burdensome and inefficient US legal and regulatory system, the emphasis on real estate investment as opposed to manufacturing, educating our own elite to work on high paying jobs on wall street and in law firms, while we skim off the educated elite of other countries for science, engineering and genuinely productive jobs.

I don't know IF the sky is falling, but I sure know WHY it is falling if it is.

[AndyJackson]

we could simply print all the extra “Monopoly dollars” we wanted, and the other players had to accept them on an equal basis with all of the other “Monopoly dollars” already in play. Yes, it devalued the value of everybody’s money, but so what? America always got the first crack at the new thin air money. No other global player could simply issue dollars, and dollars were needed to purchase oil, settle contracts etc.

Very eloquently put and sort of my point in the post above.

[Travis McGee]

Hey, we NEED a new Andrew Jackson today! He would have arrested the authors of the Federal Reserve Act if he had been president in 1913.

[AndyJackson]

He would have arrested the authors of the Federal Reserve Act

Arrest them, hell. Get a rope!

[Travis McGee]

You bet!

[Freedom_Is_Not_Free]

Ping.

This is right up your alley. You’ve stated that a weak dollar is really good for the US economy. Why is this article completely wrong, in your opinion?

[Professional]

Ok, I’ll bit, take each of the 6 article points on.

First, non discretionary spending power has not been cut in the us, but for some things like oil. While a weak currency that IS harmful, it has not happened yet. The risk is there though for sure.

Second, what benefit is it to you and me if foreigners hoard our dollars, use it as some sort of commodity, so that we become unproductive or inefficient in the global economy? A very strong currency leads to job losses...

Third, they are trying to minimalize our competitiveness with a weak currency. Ask folks about that at Boeing, or other companies right now that are seeing a surge in orders. Or to the farmer that has the Canadian and Mexican ag ops off their back? No impact?! My butt...

Fourth, Duh, isn’t the idea to become more even, so we are not constantly buying imports, moving our business overseas? Buy domestic, thought that was a good thing??!

Fifth is the worst argument. Nobody in the US is taking the beneficial currency rate and on top of that, selling at a loss overseas. Just nonsense.

Sixth, very few multinational firms actually do currency hedging. They prefer instead to win some times, lose some times, have it wash out. In the past they did, and someone always managed to screw up the hedge, and the only people that benefited were the folks charging commissions. Hedging is expensive, and turns into a game.

Freedom, there are legit reasons for a weak currency being bad. In both sides, high or low, there is gain/pain. I’d say the real dangers of a weak currency are the need for the govt to raise rates to attract buyers of govt debt, and the risk of inflation. Neither has happened, at least yet. I think the reason why this is, due to the fact that this currency run may be spec driven, not economically fundamental driven.

[Freedom_Is_Not_Free]

I appreciate your thoughts.

My layman’s knee-jerk reaction is that weak currency is bad. I’ll have to re-think this in light of your professional opinion, but I continue to have difficulty really believing the benefit.

Without doubt, a weaker currency brings some advantages, and you have pointed them out.

I guess, I am too simplistic. I recall my gradeschool days when I was taught that nation’s grew wealthy by exporting much more than they import and by being the world’s bankers. Back in the 50’s, we exported much more than we import. Now, we import much more.

We are running massive annual trade deficits with everyone from China, to Canada and Mexico. A weaker currency will make our goods cheaper abroad and make foreign goods more expensive. I don’t see how this benefits us.

Imports/Exports

Oil imports cost much more with a falling dollar and the cost is huge.

China is pegged to the dollar, so deflating our currency does nothing to slow the flow of Chinese goods in the USA, period.

US exports are 10% of our economy while imports are 20%. Like you say, a weaker dollar might close that gap. Say the weaker dollar makes exports go to 12% of our economy while imports fall to 18%. But now, the value of that 12% on the world market has fallen to 80% of what we used to bring in, so you are back to square zero. Yes, there are more dollars coming in to buy US goods etc, but anytime you want to buy materials or labor from outside the US, you are now paying 20% more for it.

In the meantime, your now reduced imports of 18% are costing you 20% more dollars than you were paying before. So you just subjected people to a 20% inflation rate on what they still choose to purchase in imported goods. Well, not China, as they pegged our dollar. But people who love BMWs and Mercedes are going to buy them despite the increases in cost, and all you are doing is sending more dollars abroad.

I am confused how all this helps the US economy.

A weaker dollar may mean more jobs, but it doesn’t seem to have stopped the outsourcing of US jobs. There are other reasons for outsourcing or moving businesses abroad such as taxes or environmental regulations. I don’t think a weak dollar is going to bring back our higher paying jobs. I can see in fundamental terms how that would work, but US businesses seem to be intent to outsource as much labor costs as possible and the dollar would have to fall off a cliff to make US labor competitive with the subsistence wages being paid to 3rd world workers. I’m not at all sure that the jobs gained from a declining dollar are worth the costs.

Global Investment

As the article pointed out, as the dollar weakens, global investors flee, as do US investors. With the business talking heads all saying how strong the global economy is and how it will weather a US recession, don’t be surprised to see a flight of American and international investors away from US assets and into global assets. This is backward. We want US assets to grow, not global assets. China and India are on their way to becoming economic powerhouses, but I would hate to see them do so 20 or 30 years ahead of schedule because US investors pour their money into global assets rather than US assets.

Also, don’t our assets become targets for foreign investors as the dollar drops. You made a very well thought out argument why this is good for the US economy, as well as reminding me how it didn’t work out to well for Japan when they bought US golf courses, movie studios and skyscrapers. But I have to wonder if those poor investments were a cause of Japan’s economic problems, or a result of them.

When foreign corporations and governments buy US assets, they stimulate the US economy with this activity, but take all the profits back home. Just like illegal aliens in the US spent a lot of their dollar here, but sent much of it back home, while a US worker spends ALL of his dollars here. So while Japan fell and could not sustain its US investments, if China and Canada and Europe start buying up US assets, I don’t forsee a crisis for them such as that happened to Japan. They should be able to sustain these assets and as long as they do, those profits will be shipped straight out of the USA.

I’m really struggling with your conviction that a weaker dollar is good for the USA. I think I understand you to mean there is a limit where it is good, while going to “peso” levels would ultimately be very harmful. But I’m still really having a hard time seeing the overall benefit of a weaker dollar. Yes, exporters will see increased trade and profits and pay increased taxes to the US government. US businesses will be sheltered somewhat from foreign competition and a decrease in imports means a decrease in the huge current trade deficits which will help the dollar rebound.

But the value of all of our investment banks plunge to the extent the dollar depreciates and their worldwide investment potential plunges right along with that. The assets they buy on the global market all cost much more now due to the lower dollar. Whatever it is we continue to import will not cost that much more due to the weak dollar. Foreign investment in our financials is less attractive as the dollar continues falling, as returns are marked down equivalent to the decreasing value of the dollar.

Beyond that, I don’t trust the US government further than I can spit and as long as they are making a killing off the process, I don’t trust the government to safeguard my personal economic situation, so when they say a weaker dollar is good, I don’t believe them. I think they are full of crap.

All around, I just can’t see the overall benefit to having the dollar off, what, over 40% in the past 5 years? I’m an engineer and not an economist. I don’t have the education or training to understand if the weak dollar is good or bad, but one thing is certain — I can’t rely on any financial professional, economist, trader or banker to give me an answer. They all completely disagree. For every one of them that claims a weak dollar will be beneficial to the US economy, another one claims that a weak dollar is the end of the world. And that is how you can be a financial pro and still have an impossible time trying to assure me that your opinion is sound and will yield the desired outcome for the US economy.

[USFRIENDINVICTORIA]

I was just Googling an old post & came across this response of yours to my post on this thread.

The Monopoly simile was excellent — the clearest explanation of “reserve currency” I've heard.

Unfortunately, we may have been prescient (without knowing it) — if the greenback loses reserve currency status, as a result of the current financial crisis; then that will be a major blow. We'll know a lot sooner than I thought we would a year ago.

[SwankyC]

*sigh* What if...

[Travis McGee]

This weekend, Bush is meeting at Camp David Maryland with Sarkozy and the head of the EU. They are supposedly discussing a G-20 or G-22 meeting, to come up with some new post Bretton Woods international financial system.

IOW, even the President of the USA is being forced to acknowledge the obvious: the dollar’s world reserve currency status is finished, kaput.

What comes next? No idea. Some attempt to “peg” a “basket” of fiat currencies as the new global reserve currency? I don’t see this as a viable alternative. Like trying to sew together bits of jello.

My hunch is that they will attempt to keep all of the nations of the world on their new version of the same old fiat, and punish any nations who break away.

Break away to what? Break away to a gold-backed currency. The first nation that does this will be the big winner, if they are willing to risk pariah status. Capital will flow into any nation or group of nations that back their currency with gold. This could be a gold Ruble, or a gold Dinar, or both.

Time will tell.