So the Dollar Is Falling - So What? (Here's What)

By Dr. Chuck Missler
Koinonia House

Gold is climbing up over $1400 an ounce. The price of oil continues to rise proportionally to the unrest in Libya. The value of the U.S. dollar is dropping down the page, and reasonable, balanced people contemplate rising unemployment and even food riots in the United States' future. However bad it looks, Wall Street analysts, international investors and bankers pay close attention to the behavior of the U.S. dollar, recognizing the effects that its strengths and weaknesses have on the economies of the world. Most of us, though, are not Wall Street analysts. What does the declining dollar mean to the daily lives of normal people?

Since the currencies of the world float against each other, a drop in the value of the dollar generally equals a rise in the value of other currencies. The British pound hit a 26-year high of US$2.1161 on 7 November 2007 as the dollar tanked worldwide. (With the global economic bust, however, the pound dropped to a 24-year low of $1.35 per £1 on 23 January 2009). As the dollar value drops compared to other currencies, like the euro or the Swiss franc, it means that foreign imports will cost more to U.S. consumers, hopefully encouraging Americans to purchase more items "made in America." It also means that U.S. exports will cost less for foreign buyers, hopefully narrowing the enormous U.S. trade deficit. If U.S. companies can sell more goods to foreign markets, that could potentially mean the creation of more jobs in the US. (Though China, with its artificially low currency, will remain a rough competitor.)

These simple results of the declining dollar can be good for the U.S. economy, but causes stagnation in European and Asian markets. Small businesses in Europe and Asia have been feeling the bite as their products become more expensive in American dollars and they find fewer buyers for their goods.

At the same time, a falling dollar also equals a loss of purchasing power for Americans and for those holding U.S. dollars. Fewer tourists will want to travel to Europe for vacation this spring and summer, finding the exchange rates unfavorable to those with U.S. currency. German cars and Japanese electronics will become more expensive. In the long run, the inflation can cause many problems as Americans find their dollars buying less while their employers remain reluctant to increase their pay. Even the costs of American-made products may go up, and the cost of food promises to rise. As the prices of imports increase, American companies may take advantage of the weak competition to push up the prices on domestic products.

In the investment world, the weak dollar also can cause problems in the long run. Foreign investors are less likely to invest in US stocks because their value might go down over time. This means there will be less capital for young or expanding businesses. As bond prices fall, interest rates will eventually be pushed back up so that investors can make up for the loss in earnings. Investors are struggling right now to hold everything together. It's a bad time to invest with a weak economy and low interest rates, and yet, investment is what creates jobs and provides folks with the money to purchase goods and services to get the economy wheels turning.

The G-20 meeting in Paris last week promised to begin a reboot of the global currency system, but despite France's clear interest in kicking the US dollar to the side of the road, no such thing happened. The finance ministers from the world's 20 largest economies managed to agree to develop a system of warning indicators - like budget deficit, foreign debt, and trade balance - that would tell officials that the global economy was wobbly. That's it. There were no sweeping calls to abandon the dollar and go to the euro, despite the hopes of French President Nicolas Sarkozy. Even the Chinese, who have long wanted to replace the dollar with another reserve currency, were not willing to press the issue at the forum. If the U.S. dollar were replaced, they would want to replace it with the renminbi, but not just yet. China is still holding on to a great many U.S. dollars, after all, and it's trade situation is quite pleasing to its government right now. As long as China keeps its own currency low, it can take advantage of the world's willingness to purchase its goods and services,

In the end, the dollar is not faring well, but it gets to keep its job as world reserve currency. For now.

Related Links