The Weak-Dollar Threat to Prosperity

The Wall Street Journal ^ | October 7, 2009 | David Malpass

[khnyny]

If you want to know why the dollar has been falling this week and gold hit a new high, look no further than the weak jobs numbers last Friday and the weak communique issued over the weekend at the G-7 meeting in Istanbul. Deploring "excess volatility and disorderly movements in exchange rates" isn't exactly a ringing defense of the greenback. And 9.8% unemployment convinced markets that monetary policy will remain loose regardless of dollar weakness.

Bond buyer Bill Gross of the Pimco fund summed up the situation nicely in a recent CNBC interview. Asked whether low interest rates will weaken the dollar, the influential allocator of global capital said: "I think that's part of the administration's plan. It's obviously not announced—the 'strong dollar' is always the policy, so to speak. One of the ways a country gets out from under its debt burden is to devalue."

On the surface, the weak dollar may not look so bad, especially for Wall Street. Gold, oil, the euro and equities are all rising as much as the dollar declines. They stay even in value terms and create lots of trading volume. And high unemployment keeps the Fed on hold, so anyone with extra dollars or the connections to borrow dollars wins by buying nondollar assets.

Investors have been playing this weak-dollar trade for years, diverting more and more dollars into commodities, foreign currencies and foreign stock markets. This is the Third-World way of asset allocation.

Corporations play this game for bigger stakes, borrowing billions in dollars to expand their foreign businesses. As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad.

[khnyny]

"Measured in euros, U.S. per capita GDP is down 25% since 2000."

[DManA]

The weak dollar is a symptom of the deliberate ATTACK on our prosperity.

[khnyny]

The historical context of this opinion piece was good, imho.

Though British equities rose in pound terms, they generally underperformed gold and foreign equities. At the end of empire, the giant sucking sound was from British capital and jobs moving offshore as the pound sank.

Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create. This was the lesson of the British malaise, the Carter malaise, the Mexican malaise of the 1990s, Yeltsin's Russian malaise through 1999 and the rest. No countries have devalued their way into prosperity, while many—Hong Kong, China, Australia today—have used stable money to invite capital and jobs.

The more the dollar devalued against the yen in the 1970s and '80s, the more Japan gained share in valued-added manufacturing, using the capital from weak-currency countries to increase productivity. China is doing the same now. It watches in chagrin as the U.S. pleads with it to strengthen the yuan, adding productivity fast with the dollars rushing its way in search of currency stability.

[griswold3]

Exactly!
The key word being...deliberate.
TPTB have chosen “Greater Pain Latter”. Recognizing the losses, putting the REO’s on the market, recognizing the smaller pensions due to the losses of the plans, nationalizing the banking system with a path to future privatization, declaring all the CDS contracts illegal betting slips, nationalizing healthcare, extending unemployment, and extending section 8 housing would be painfull. But, then we could rebuild. Maintaining the various “fictions” only guarantees a worse outcome.
Repeat...guarantees!

[reefdiver]

Good article, but it won’t be read by thoes currently in power. It’s from the WSJ not the nyt

if it doesn’t change in 2010, bricks will fly as maxine w said