Weak Dollar is Bad For America - and ETFs
Martin Feldstein, the Chairman of the Council of Economic Advisors under President Reagan, wrote an article for the Financial Times recently which outlines why he believes that a more “competitive” or weaker US dollar is good for America.
I cannot overstate how strongly I believe that this opinion is incorrect. “Strong Dollar, Strong Currency” is more than a mantra for me since economic history indicates that no country has ever achieved greatness nor maintained it by debasing its currency.
Have you ever heard of a country in deep economic trouble because of a strong currency?
Mr. Feldstein rolls out a litany of reasons why he believes America benefits from a weaker dollar. In short, increasing exports as well as maintaining growth and employment.
Here is my case 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. In Europe, the number of millionaire households grew by 26.4% in 2007, the highest of any region in the study, helped by its strong currency against the weakening U.S. dollar. Switzerland has the ranking for highest density of millionaire households, with millionaire households accounting for 6.1% of all households.
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 deficit is due to oil imports that are denominated in US dollars. An additional 20% is due to trade with China which is of course controlling the value of its currency. A weaker dollar is also hampering marketing efforts in strong currency countries. One example is $600 three star hotel rooms in London. A weaker dollar may give a bump to exports short term but then like a drug it wears off and starting all over again from an even weaker position.
Fourth, a weaker dollar is inflationary since it increases the cost of imports. Just look back to the US economy during the 1970s – ugly stagflation and markets going sideways year after year. I might also add that plenty of countries under IMF tutelage devalued their currencies with the hope of exporting their way out of financial trouble – name one such program that worked.
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 American products – superior quality, innovation and service.
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.
What a weaker dollar really does is to encourage American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. A weak dollar encourages capital outflows as investors chase the momentum of higher yields and currency appreciation. Many Asian currencies are hitting record highs against the U.S. dollar. The Australian dollar has climbed to a 25 -year highs, while the Singapore dollar has touched 10-year highs. The Brazilian real, which has jumped 18% in value against the U.S. dollar in 2008, and the Indian rupee's sharp appreciation against the U.S. dollar during the past year, have supercharged U.S. dollar investors' returns in those markets.
According to EPFR Global, investors are pouring money into global funds - net inflows of $96.94 billion into world equity funds in 2007 has accelerated in 2008 and investors are also taking out tens of billions out of U.S. equity funds. Foreign investors slashed their holdings of U.S. securities by a record amount as the credit squeeze has intensified, according to the latest Treasury figures. The Treasury said net sales of US market assets – including bonds, notes and equities.
Last and perhaps most importantly, I view a policy of weakening the U.S. dollar to improve America’s competitive position as the path of least resistance. Let’s not roll up our sleeves and cut federal spending, greatly simplify our tax code to encourage productivity and achievement or reduce corporate tax rates and excessive regulation. Let’s just wink and weaken and let our nation’s currency drift lower on automatic pilot.
My view is that the value of a nation’s currency reflects the perceived value of country in the global marketplace. The Fed's policy of just reducing the discount rate to stimulate the economy is a foolsih policy. Look at Japan which tried the same driving its interest rate to zero. Now it still has low growth and can't manage the will to raise its benchmark rate above 0.5%!
Maintaining and strengthening the value of our nation’s currency is in the best interest of American consumers, businesses and investors.
Related Articles
|
Top Rated Comment Streams:
-
1.Hedged In662
- 2.
-
3.Smarty_Pants422
-
4.axelrod608326
-
5.cos1000274
- Free E-Newsletters
This article has 19 comments:
-
phdinsuntanning
-
433 Comments
My Website
Mar 24 06:43 PM-
damienhaas
-
20 Comments
Mar 24 07:29 PM-
Jason Mark
-
9 Comments
Mar 24 07:36 PM-
Andrew Corn
-
14 Comments
My Website
Mar 24 07:39 PMI am vacationing in Barcelona. The middle class has been priced out. It is a shame what has happened to the dollar.
AC
-
E.D. Hart
-
154 Comments
Mar 24 08:26 PMWe can blame the borrow and spend Republicans who controlled the house and senate, and White house for letting the country derail...the Iraq war is partly responsible at an estimated 3-4 Trillion dollars that is borrowed on the backs of our children. A weak currency is a sign of a country in crisis after a certain point. I would vote for Ron Paul, the only Politician I have heard that speaks clearly on these matters--A true conservative.
-
crowdofcheerleaders
-
59 Comments
Mar 24 09:11 PM-
Tony Soprano
-
137 Comments
Mar 24 09:19 PMWith a weak dollar we will buy fewer goods from China and the rest of the world. Commodities will drop.
This is why Jim Rogers is so angry. He actually believes the the 20 year commodity bull market.
China has high inflation, bad pollution and internal political issues. China will falter and the dollar will gain.
-
sedek
-
30 Comments
Mar 24 09:53 PMExcellent piece, but will point out that Americans love their big government as long as they aren't paying full price for it and that no politician can get elected on a platform of fiscal responsibility, which is why the three remaining presidential candidates are all running on four more years of Free Lunch. Commodities look good as far ahead as I can see.
As a great man once said, "Strong currency is the foundation of empire, weak currency is the doormat to Hell."
-
R. Richard Schweitzer
-
152 Comments
Mar 24 10:37 PMIs "strong" really measured in terms of other currencies, or in terms of what goods and services it can obtain from wherever (home and abroad) for American users?
What stands behind all these "FIAT" currencies of the world? Anything tangible?
I submit that what supports the U.S. Dollar is PRODUCTIVITY.
Bank reserves (hence the reserves of the FRS) consist (in the final analysis) of the obligations of the U.S., obligations of businesses (discountable notes, etc.) certain forms of obligations of individuals.
All those obligations are to be met out of productivity, work to pay taxes that will pay off U S obligations, production to pay off business debt, work to pay off individual debts.
Has the currency issuance increase outrun the productivity increase? That is the issue. Can we raise the rate of increase in real productivity? That is the challenge.
-
Dragon Master
-
17 Comments
Mar 24 11:13 PMWhen Japanese Yen appreciated from 260 Yen/$ to 80 Yen/$, Euro from 0.8$/Euro to 1.56$/Euro, Chinese Yaun from 8.25 Yaun/$ to 7.09 Yuan/$, US trading deficits with these 3 manufacturing power house goes up every year.
Also weak dollars increased importing prices and booted trading deficits.
US is loosing its roots, good social values, family cells and manufacturing power and bases. US Emperor is falling since 2001 as long as Wall Street controlled by Jews for fast money, the hookers like Ann Nichole and Kristan taking the headlines as role models for youth millions per show, The president dick got sucked by his inter in the office and calling no sexual relationship, the governor picked up the hooker while telling everyone "I am virgin even though I am hooking"
-
Mafeking
-
35 Comments
Mar 25 02:32 AMThen around 2000 the dollar strengthened and indeed there were calls of doom and gloom because of the (relatively) strong dollar.
A number of factors including US/Bush's unpopularity and the internal machinations of the Fed have helped push the dollar down this time round. I am betting that 5 years from now things will be different and I will have made good money on my bet as the dollar rebounds.
Many writers are thirty somethings. The problem with being a thirty something is that they have not seen it before and don't have a long view.
-
Anandakos
-
13 Comments
Mar 25 03:44 AMMr. Delfeld,
"Let’s not roll up our sleeves and cut federal spending, greatly simplify our tax code to encourage productivity and achievement or reduce corporate tax rates and excessive regulation."
Ah yes, it's not the crooks on Wall Street who got us into this mess. Oh, no! It's those damn LIBERALS who so foolishly worry about the health and welfare of Americans. Shame on them!
Who do they think they are, trying to spend the hard earned lucre of some differential equation addled charlatan at Bear-Stearns. Shame on them!
They take the Socialist bloviations in the Declaration of Independence and Bill of Rights FAR too seriously. Shame on them!
I say let's simplify our tax code by making ALL income, from whatever source taxed equally,with two modest steps -- 10%, 18%, and 26%. We can discuss the specific numbers and the ranges.
I would agree to tax genuine outlays for capital improvements to an existing sole proprietorship or partnership -- except of course the annual Hummer -- or purchases of TREASURY shares or bonds directly from a corporation at a lower capital gains rate. And it certainly makes sense to index the basis of investments, so people aren't paying taxes on inflation.
But, what you call "investment" -- e.g. the purchase and sale of previously owned financial certificates -- is not investing, it's speculating. It provides no new capital to an enterprise, it's just a bet that a Greater Fool can be found on which to unload the paper.
Now I plead guilty to speculating; I understand that in a growing economy a well-run enterprise offering people a product they want and can use is a very good thing for all concerned. And it's often a good bet for a speculation. But I have no illusion that I'm benefiting the companies whose stock I hold in any way.
Oh, yes, by buying my latest tranche of shares I puffed up the restricted shares and options that the management uses to avoid taxation, but it didn't help the company itself.
-
Ming
-
25 Comments
Mar 25 03:45 AMoh yes. Britain tried to fix its currency at overvalued valuations after the war. so, there u have it, strong currency lead to deep economic trouble.
-
who
-
124 Comments
Mar 25 12:37 PMBen and co. diving into deep waters with BSC and JPM issue and lending to brokers.
US is too big to fail, the fallout will hurt everyone globally. Countries with strong currencies will even buy up American companies.
-
dfloydr
-
10 Comments
Mar 26 03:50 AMWhen The British Empire devalued the pound circa 1948, that marked the end of the Empire.
Dr. Art Laffer once did a study of some 34 post WWII devaluations. In no case did the balance of trade improve, although, one government after another, gave it a try. His recent comments suggest to me that he might have forgotten about this study he did some years ago.
Devaluations may help selected industries, but not a nation. Heck, even now large chunks of Boeing aircraft are built in other countries and shipped to the US for assembly. Pretty soon, those tail assemblies or wing flaps will start to cost them more which will mitigate whatever benefit Boeing sales might realize from a weak dollar. Iron ore, aluminum ore, copper are all up in dollar terms so our companies that do export are facing rising input costs.
This GWB/Cheney/Paulson "strong dollar" policy is all talk.
Several people I know have done quite well recognizing what nonsense this administration is speaking, and their portfolios are up very nicely thanks to betting against the dollar in various ways. Conversely two foreigners I know have done well by selling off a $100mm+ portfolio of US commercial real estate over the past three or four years so as to get away from this not so "strong dollar" policy.
The problem is, once a currency starts to slip, many forces come to bear to accelerate the trend. For example, a copusin of mine is a corporate jet pilot. On landing in Nairobi recently he found he could not refuel with dollars. He had to find someone who had a Shell credit card denominated in Euros. He then had to pay the card holder in dollars at a 20% premium to the then current exchange rate : $1.70 for each Euro. Ouch!!!! And today - only a couple of months later - that same deal would be at $1.87 for each Euro.
-
puttster
-
29 Comments
Mar 27 05:46 PMUSA 1930's
-
Wolfeman
-
1 Comment
Mar 28 10:40 AMBank reserves (hence the reserves of the FRS) consist (in the final analysis) of the obligations of the U.S., obligations of businesses (discountable notes, etc.) certain forms of obligations of individuals.
All those obligations are to be met out of productivity, work to pay taxes that will pay off U S obligations, production to pay off business debt, work to pay off individual debts. "
Absolutely!
Energy is required to be productive, as energy is synonomouse with work. Energy is the key, since we are approaching an energy crisis of epic proportions.
Spend some time, and study "Peak Oil", its ramifications, and the inability of new technologies to make a difference.
Our Fiat currency must fail, as it cannot grow exponencially forever.
Our industrious leaders will cry that we the people will require a new monitary system similar to the Euro in order to compete with all the other unions emerging globally. Once the dollar is completly destroyed, we the people will cry for the new monitary unit to be put in place to ease our suffering. Thus will emerge the new North American Union, completed on schedule. Thus will emerge a new social order, that does not include the Constitution, or the Bill of Rights, propery ownership, or free speech.
-
Kunst
-
783 Comments
Mar 31 06:14 PMInflation, in the common sense, is when prices and incomes go up. When only prices go up, it's called "getting poorer."
-
Commodity bubble proponent
-
56 Comments
Apr 15 04:50 AMThis will actually cause far more damage to the global growth story than the US Economy for a few reasons.
1. Increased commodity inflation puts China in a lose-lose situation. As we all know, China is the world's source of cheap labor. If China allows the yuan to appreciate to fight commodity inflation, it will lead to less demand for their goods overseas and a reduction in their labor force. Since China's stability is dependent on double digit growth, underemployment will create further instability.
Looking at it from the other angle, China's population cannot afford to keep the yuan weak to fund the rapid growth in the country. Since the average Chinese person spends nearly 25% of their income on food and does not have nearly the disposable income of the average person in the developed world, China's population cannot sustain a dramatic price inflation of basic commodities. If the state government tries to control prices, it will lead to shortages of raw goods, since the input costs for farmers to grow food will be higher than the final output. This is potentially devastating.
It seems as though China will be forced to unfairly absorb much of America's excesses vis-a-vis commodity price inflation. Once the Chinese bubble economy does in fact deflate to more appropriate levels, this will have serious knock on effects on the commodity producers, thereby deflating the commodity bubble and the rest of the emerging markets.
Ouch...