The Consequences Of The Falling Dollar

Posted on May 15, 2006

If you're an American who has a lot of money in CDs who never travels abroad, never buys foreign goods and has no debt, the falling dollar is good news for you. For everyone else, it's not good at all. The Christian Science Monitor lays out the consequences of the dollar's recent freefall against other world currencies:

If the dollar were to continue falling, it could have wide ramifications:

It could imperil the economy next year because Fed Chairman Ben Bernanke might have to defend the currency with higher interest rates.

A lower-valued dollar makes imports more expensive, possibly ratcheting up the inflation rate. But it could also stimulate US exports, thus providing more jobs.

This summer, Americans traveling abroad will feel as if everything is expensive. However, foreigners coming to America will feel as if the country is one giant Wal-Mart.
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Behind the falling currency is a changing global economy. As the US Federal Reserve appears to be near the end of its round of interest-rate hikes, foreign banks are starting to hike their rates - which puts foreign currencies in higher demand, thus making the dollar less attractive. Thursday, in fact, the president of the European Central Bank indicated that rates could rise in Europe next month. At the same time, the giant US trade imbalance has produced a huge outflow of dollars to other countries, as well as the need to finance the ever-bigger US deficit. The deficit has attracted increasing scrutiny, most recently at a meeting of finance ministers in Washington last month.
In addition, the central banks of some foreign countries, which are key in financing the US deficit by buying US Treasury bills, are now less willing to do so. Instead, they're diversifying their reserve holdings with euros and yen.

This is what happens when you 1) finance a costly, unnecessary war by borrowing billions from the Chinese; 2) give tax breaks to giant corporations for outsourcing American jobs thereby destroying our manufacturing base; and 3) fail to strike hard bargains at the worldwide trade negotiating table which require the "open markets" concept to go both ways. The U.S. must require foreign countries who want access to our markets to open their markets to U.S products: Ronald Reagan always drove a hard bargain at the trade negotiating table, unlike the current administration.

Globalization is happening; it's an unstoppable force. But it should be managed and allowed to happen over time. By unnaturally speeding up the process, almost overnight American is quickly becoming a nation which produces nothing and yet has an insatiable appetite for foreign goods. This leads directly to the trade deficit and the inevitable rise in interest rates to prop up the dollar. Because if the dollar falls too far our Chinese and Saudi bankers will stop holding dollars and switch to another currency such as the Euro. That is the first step towards America becoming a second world country, not a first world country.