RSS Feed for This PostCurrent Article

What Does A Declining Dollar Mean?

By Larry Doyle on May 23, 2009 at 10:15 AM in Economy

On the heels of Thursday’s comments by Bill Gross of Pimco that the implied AAA credit rating of the United States will eventually be downgraded, our dollar was hit hard again yesterday. Let’s address some questions about a weaker dollar:

1. What are the implications of a weaker dollar?

- more expensive to travel overseas

- higher inflation here at home

- perceived greater risk of holding the currency and dollar denominated assets

- given the greater perceived risk, investors will demand a higher rate of return. In other words, interest rates will head up (and are currently, especially longer maturities).

2. What are the risks?

- significant exit of foreign capital from our market. Can you imagine the conversations going on around the world, but especially in China and Japan the two largest foreign holders of our debt?

- as our economy is forced to pay higher rates to attract capital, the economy slows as the cost of debt service increases.

3. Are there benefits?

- in a perverse way, I think our political leaders actually want a somewhat weaker dollar. Why?

- A weakened dollar will help domestic production of goods relative to our continued reliance on imports.

- generating some inflation is a de facto means of devaluing our outstandng massive amount of debt. Whomever is in debt currently can actually pay back those debts in future dollars that are worth less.

- however, having the dollar decline in value marginally is akin to getting a little bit pregnant.

4. How do you stem the decline in the value of the dollar?

- increase short term interest rates, that is, the Federal Funds Rate (currently sitting at 0-.25%) will have to go higher. What does that mean? Higher rates lead to a slowing economy. Although given the current economic turmoil, the Fed may have to increase the Fed Funds rate even sooner than they desire and we could suffer through a nasty bout of STAGFLATION.

Playing with the valuation of the currency and not defending it is a VERY dangerous game.

LD

  • termo

    This was the warning of conservative Republicans when Obama took office when they warned about excessive spending that was engaged in as well as excessive bailouts even under Bush.

    Obama never ran a business or even a government unit until he became President. Now he has recklessly placed this country on a path that will exceed the troubles of the stagflation we had in the late 1970s and early 1980s.

    Apparently Obama is admitting that we have run out of money and has stated that we cannot continue to borrow without risking very high inflation.

    Imagine that. He just figured that out but not until he spent everyone’s else’s money and forced us into a situation where we will have to raise taxes across the board. And the media will give him cover as if he had nothing to do with creating this situation.

    The danger we face having committed to the most excessive spending in American history is that we will have yet another recession soon which could be more troubling.

  • knotfourhymn

    Will the downgrade also increase the demand from certain countries for the US dollar to be replaced as the global currency?

    • http://www.senseoncents.com Larry Doyle

      not right away, perhaps, but eventually…

  • FrenchNail

    On a personal level, a lower dollar means bye-bye my holidays house in the Perigord (the land of the REAL truffles as in the most expansive mushroom in the world). That said real estate prices have also taken a tumble over there, so the dollar plundge would pretty much be a wash if only I had not lost about 30% of my wealth….

    But I agree with you, I think that this governement is not so distrout at the idea of a weaker dollar (as any thing American, weaker is good in their mind).

    A weaker dollar is indeed a very dangerous game because unlike in the seventies when we also had a very week dollar, the barbarians are barking at the gate. China, Europe and India are waiting for the occasion to “liberate” themselves from the supremacy of the dollar standard, and once they get the opportunity to establish a multi-currency standard, there will be no coming back and America will have lost forever a huge portion of its paper value.

    The evidence are mounting that the Obama’s administration key players are of the mind that America’s leader position in the world is oppressing and unjustified. Hence they have no problem at looking at a situation where we would be valued at our current reality and not established perception (with all the priviledges it entails)

    When Obama says he wants America to regain its position in the world, he means it, except that for him America’s position should not be a position of leadership but of partnership with other nations on equal footing.

  • Pingback: Interest Rates » What Does A Declining Dollar Mean? : NO QUARTER

  • SJ

    Obama said today in an interview on C-Span to host Steve Scully “WE ARE OUT OF MONEY”

    Get it people America is broke!!!!according to the great one.

    • Animal Control

      that’s cause he used it all to buy the election.

  • Seattle Moss

    Hello Larry,

    - A weakened dollar will help domestic production of goods relative to our continued reliance on imports.

    So the question is….Does a slight drop in the dollar help my exports to Canada.
    I have been busy putting into place strategic alliances that under certain conditions the Canadians will turn to me in a stampede to have their products produced.

    • http://www.senseoncents.com Larry Doyle

      Seattle Moss….good to connect. Theoretically and at the margin this should help you. I gather the question becomes whether there are other factors that may create some degree of friction.

      All other things being equal, though, it should help. Please let us know how it plays out.

  • Lisabona

    YES, AMERICA IS BROKE. It will be worst, until we stop giving away money borrowed from China, Japan, to other countries like, Plaestine (20,3 mill,) Kenya, 2-3 shipments with I don’t know what. God knows,how many others are out there. Our Government,sold us out, auction our future, our childrens future,borowing money and give it away, living us, the American people with years and years of debt. It’s time, America , weak-up,and stop this nonsense. Help others, but, first, help yourselfs. For our government, we should be, American people should be, the priority.

  • http://noquarter foxyladi14

    charity begins at home..

  • http://deleted Aaron Kramer

    Larry I really think you understating the problem. The real issue is not a cheaper dollar rather a complete collapse of the dollar. A cheaper dollar over time is inevitable but a complete collapse will lead to martial law and social strife not seen in quite some time. If the dollar collapses there will be no exports to sell or debt to repay with cheaper dollars because people won’t want them. Obama said today that we are broke, look for the dollar to sell of big time next week.

  • Miss H

    Only in America would we let the bankers move $14 trillion offshore and then let them charge us interest on the heist. Wake up America, audit the Federal Reserve and indict the banker bandits.

  • http://www.senseoncents.com Larry Doyle

    Markets as deep as the dollar do not go anywhere in a straight line.

  • Lawyer from Missouri

    BHO the Usurper stated the following in a C-Span interview yesterday (source drudge, Count Us Out, and The Obama File)

    “WE’RE (US) OUT OF MONEY, NOW”

    It took BHO 123 days to bankrupt America.

    Every man, woman and child need to fend for themselves for real. It is going to get real ugly out here.

    • IndianaDem

      It took BHO 123 days to bankrupt America.

      I think not. We’ve been working toward that eventual outcome by way of the dramatic escallation of deficit spending during 3 of 4 previous presidential administrations–Bill Clinton’s being the single exception.

      The formula for disaster is common-sense simple: Consistently spend more than you take in. This works equally well for individuals, for household, for businesses, and for governments.

      The formula for rescue is equally common-sense simple: Stop doing it.

      Balance must be achieved in an orderly fashion, or balance will be imposed in an disorderly fashion by the laws of common-sense economics. This is not a republican or democratic opinion. It’s hard reality.

  • Eastan

    I am a software developer. I fly mostly solo now but, over the last twenty years, I have owned companies that have employed a lab full of developers. While trying to sell one of my companies I was told: “Why should I pay you top dollar? I can hire an analyst to study your applications and ship the programming overseas where I can buy a lot more code for the dollar, and be up with a competing product in no time.”

    Oddly enough, Larry, a devalued dollar would make east-sourcing more expensive and help the homegrown U.S. software development firms and their programmers. I say this because I was pondering your brilliant line above,

    2009-05-23 17:06:36: “Markets as deep as the dollar do not go anywhere in a straight line.”

    Though there probably would be a down sliding zigzag on the overall economic chart, there might be some bright moments when profit from a declining dollar can be captured.

    Sorry I am late to this post discussion. I was busy reducing growth – in the rough behind my east yard.

  • John Smith

    People who borrow and spend only stop doing it once they can’t borrow anymore. I think at this point there is no way out of this unless congress and BO enact major new taxes but since that would be political suicide they will just keep doing this hopping they can get away with it for an other term.

  • RWR

    The point of a weaker dollar is to pay back out huge debt in cheap money.

    • IndianaDem

      Yes. Deficit spending is nothing more than hidden taxation. We’re taxed to the extent that the buying power of our dollars diminish. The government stays a jump ahead because they get first use of the deficit dollars, before the resultant loss of value catches up. And, as you rightly point out, they get to pay on the debt using dollars worth less than they were when they initially spent them.

      Republican tax cuts were actually illusionary. They simply shifted honest, upfront taxation to deficit spending. They’ve convinced otherwise smart Americans that it’s possible to have your cake and eat it too.

  • CG

    How about this???

    The house that taxpayers built
    New York’s billionaire mayor used public funds to build the new Yankee Stadium for the richest team in sports.
    By David Sirota, May 23, 2009

    Somewhere, likely in a basement, the next great documentarian is scavenging YouTube for clips of congressional inquisitions, Wall Street perp walks, and CNBC rants for a future Oscar-winning film about the times we’re living through. I’m hoping this future star calls her film “Wall Street II: Cataclysmic Boogaloo,” and more important, I’m hoping she gets footage of New York Mayor Michael Bloomberg, preferably wearing a top hat and monocle.

    Even amid CEO testimony, Bernie Madoff grimaces and Rick Santelli diatribes, nothing better captures the moment’s destructive greed than a billionaire politician using the municipal office he bought to defend charging $2,500 a ticket to a new Yankee Stadium he forced the public to finance. If there is a single act showing how kleptocracy and let-them-eat-cake-ism are systemic and local rather than momentary and exclusively federal, Bloomberg turning the House that Ruth Built into the House That Taxpayers Built is it.

    Foreign oligarchs use guns to confiscate citizens’ wages. American oligarchs rely on government to give theft the aura of legitimacy, and Manhattan’s richest man is no exception. As an investigation by Democratic Assemblyman Richard Brodsky documents, Bloomberg used various public agencies to extract between $1 billion and $4 billion from taxpayers and then spent the cash on a new stadium for the Yankees, the wealthiest corporation in sports.

    The move followed a Bloomberg-backed 2005 initiative giving infamous investment bank Goldman Sachs $1.6 billion in taxpayer-financed bonds to construct its new headquarters — and amazingly, this encore rip-off is more spectacular. Mimicking tax cheats’ deliberately complex transactions, the city owns the stadium, leases it to an agency, which then leases it to a corporate subsidiary, which then leases it to the Yankees. At the end of the Ponzi scheme, the team is permitted to use the taxes it already owes to pay off the mortgage on its new chateau.

    New Yorkers might be celebrating if these giveaways delivered verifiable returns to taxpayers. But Brodsky’s report notes that “there is little in new job creation, private investment, or new economic activity” from the expenditure. Taxpayers don’t even get affordable seats. According to Newsday, they get a stadium charging the highest ticket prices in baseball — $2,500 for “premium” views (since reduced to “just” $1,250) and $410 for a family of four in the cheap seats.

    Like Wall Street firms insisting that trillion-dollar bailouts are a small price for economic stability, Bloomberg justified everything first by saying taxpayers “put next to nothing” into the stadium. (In fairness, a media-mogul mayor who is the planet’s 17th wealthiest man may genuinely believe a few billion is “next to nothing” — but, for comparison, it’s more than all the devastating cuts to police, firefighting, school and infrastructure budgets that he proposed in his budget.)

    Then Bloomberg offered the same laissez-faire paean that financial CEOs cite in opposing executive pay caps. “Don’t ever think sports is anything but a business,” he said, joining bankers in selectively forgetting that arguments for free-market “business” ring hollow when government is propping up said “business.”

    If this tale of the House that Taxpayers Built was some anomaly, it might be vaguely funny. But while Bloomberg sets milestones for avarice, the bailout-ism he espouses is the norm.

    In Washington, “The Obama administration has broken all records in the distribution of taxpayer dollars to American businesses, primarily banks, automobile manufacturers and insurance companies,” reports the Huffington Post. At the local level, lawmakers trip over themselves to throw giveaways at corporate campaign donors.

    In the new Gilded Age, socializing risk and privatizing profit has become the standard — as American as General Motors, Bank of America and, yes, the New York Yankees.

  • http://uppitywoman08.wordpress.com Uppity Woman

    It all stinks of Jimmy Carter to me. Including the malaise. Next, we will see Obama on TV in a sweater ragging on how awful we all are.

  • Blunt Force Trauma

    Well, he finally stated and solidified what we already knew….

    Barack Obama: “We Are Out Of Money”

    Fast forward to 13:01 minutes in the linked clip below, in which the president, interviewed by C-Span, has the mother of all Freudian slips and discloses just what the real state of the economy is.

    http://tinyurl.com/qql2cd

    Now that you have that little gem to chew on, think of how these were passed, just last week, in light of that admittance by Owe-bama:

    GM borrows additional $4 billion from government (May 22, 2009)

    http://tinyurl.com/qt7prz

    U.S. government giving GMAC US$7.5 billion in new aid for car loans (May 21, 2009)

    http://tinyurl.com/p9g4yd

    US Senate approves $100 billion IMF line of credit(May 21, 2009)

    http://tinyurl.com/pnc5vo

  • NYSmike

    Obama has a great wishlist, but he also thinks he has a credit card with unlimited funds. The two don’t mix.

    I think he also realizes that he may not have a full dem-controlled government when voters actually open their eyes.

  • Basheer

    Consider this as the judgement from god for targetting muslims by the use of a name called “war on muslims…”

  • Basheer

    Consider this as the judgement from god for targetting muslims by the use of a name called “war on islam…”

  • John

    The argument that a declining dollar significantly helps our export/inport balance may be fallacious.

    That is because of threshold effects. If China and other countries have much lower labor costs, the lower dollar will not be sufficient to make our domestic goods cheaper than the Chinese imports. In other words, the exchange rate adjustment is still not enough to cross the threshold where our domestic goods are cheaper than the imported goods. The result? We simply end up paying more for the Chinese import. As long as we have high litigation costs, unreasonably high union wages, high taxes and over burdensome regulation, we will continue to be uncompetitive. A declining dollar will just make everything more expensive. Inflation in other words.