weakdlr

Issue #44

Last Update March 2, 2006

National The Weakening Dollar by Gerry Krownstein Since January, 2001, when the Bush administration took office, the dollar has lost almost a quarter of its value against the Euro. There are many reasons for this decline, not all of them attributable to US policies, and many consequences, some positive and some negative. There is little reason to believe, however, that anything of consequence is being done to analyze this situation, determine the benefits and detriments to our economy, and create plans to maximize the benefits and mitigate the negative impacts. Certainly this is not a situation in which the government feels comfortable in sharing information with the citizenry.

Despite a small recovery in February, the decline over the last three years has been steady and consistent; clearly this is not a short term problem that will quickly correct itself. Part of the decline can be traced to the Euro's recovery from an artificially low valuation when the Euro was new that reflected uncertainty about the ability of Euro countries to coordinate their economies in a manner supportive of a single currency. Part of the decline reflects the artificially low interest rates maintained by the Federal Reserve in an attempt to counteract the drag on the economy from the bursting of the dot-com bubble, and to mitigate the adverse economic impact of the Bush tax cuts. A major part of the decline, however, reflects the combined impact of balance of payments deficit and budget deficit that is the clear result of the administration's lack of sane economic policy.

In the short term, it is likely, though not assured, that the weak dollar will help US exports. In earlier times, this would have improved our balance of payments situation, stimulated investment in plant and equipment, and improved the jobs outlook. Simultaneously, imports would drop as they become more expensive in dollars. Ultimately, the dollar would have strengthened, partly as a result of the improved US economic picture, and partly as a result of Euro nations lowering interest rates and weakening their own currency in order to remain competitive. The current situation may not have as rosy an ending, however. A larger percentage of our manufacturing base is controlled by multinationals, and even 100% domestic corporations are resorting increasingly to overseas outsourcing for both manufacturing and (newly) for services. Increasing US exports is likely to have a smaller impact than heretofore on employment, and thus on tax revenues. Without the domestic stimulus of a positive jobs picture, the normal improvement in the US domestic economy is unlikely to happen, while at the same time inflation is likely to increase, so dependent have we become on imported goods for energy and the tools of daily life. Only agriculture and mining are likely to flourish under this scenario. A country that exports raw materials and foodstuffs and imports manufactured goods is known as a colony.

As perhaps the largest of the debtor nations, the United States has a long-term problem: as confidence in America as a store of value declines, foreign investors will become more reluctant to park their money here. This confidence can be shaken by the perception of an economy heading for disaster, or it can be shaken by currency decline that nullifies their investment income. Without domestic economic policies that improve the deficit outlook, brighten the jobs picture and improve our balance of payments, overseas investor confidence will not be maintained. The result, a decade down the road, could be national bankruptcy.