2010-01-02
Why A Weak US Dollar is GOOD for American Consumers
The US Dollar may not be worth much more than toilet paper in the International Economy, but it will still have value in the United States... for now. This might seem like an absurd notion at first, but it's certainly worth considering. While the value of our currency here is often criticized as a major problem with out of control government spending, the United States is outraged that China is devaluing its own currency (specifically by linking it to the US Dollar). So if a devalued currency is such a bad thing for us, shouldn't we be happy that we're at least going to take China down with us?
Not so fast. The thing is that a devalued currency is actually a positive thing for that country's economy and industry, especially in manufacturing. The reason for this is two fold. First, if the US Dollar is weak, it means that the entire US Population is making less. But that's bad! Again, hold your horses. We're making less, but relative to who? The food we eat, the homes we build, and just about everything else we buy and use on a daily basis is made in America. And what isn't made in America is made in China, which is fine from the citizen's point of view because China's currency has devalued with ours. In other words, we have figured out how to have cheap labor while maintaining our standard of living. Instead, we're all making less relative to where we were before in the international community. As immoral as that seems, it's actually somewhat brilliant.
Since it costs the same number of US Dollars to build a toaster oven, but the value of the US Dollar has gone down relative to other currencies: that toaster oven is going to be more affordable to foreign markets than it was several years ago. That means more people will be employed producing toaster ovens for the newly opened markets.
But that benefit has a flip side as well. Coincidentally, it's also a positive for the American worker. The cost in Euro for a European Toaster Oven company to produce a toaster oven hasn't changed much over the years relative to the Euro. However, the Euro has been more "successful" than the US Dollar over the past few years. That means the price of the European toaster oven in US Dollars has increased. That means that US Demand for European toasters will decrease, and as a result, the demand for American-made toaster ovens will increase.
The problem with our diabolical plan to manipulate our currency by outrageous spending is that China has linked their currency to ours. What's worse, if you're buying a toaster oven, odds are it's a Chinese toaster oven rather than a European Union toaster oven. Because of China's economic rise, their currency should be increasing in value, making their products less affordable and making US products more affordable. But by linking their currency to the US Dollar, China is ensuring that they will always have the same relative economic advantage provided by currency exchange rates over the United States.
The US frequently argues that this is only in China's short-term interests. But is it? We are pretty severely in debt to the Chinese. The current fixed-exchange rate between us and them is 1 USD = 6.8 RMB. If China's currency were to increase in value relative to the Dollar, let's say 1 USD = 3 RMB, the US trade deficit to China will be cut by more than half.
Now, with that said, there are two very, VERY bad flaws with this diabolical system of self-devaluing currencies, neither of which affect China and both of which affect the United States. The flaw is that we're devaluing our currency with debt. China is devaluing their currency with exchange rates. In other words, China's devaluation is legitimately artificial while ours is very real. Debt, of course, is bad and bad things can happen while you're in debt.
So far, we've been lucky. The rest of the world has been willing to finance our devaluation of our currency. This, however, leaves the door open for catastrophic things to happen. For example, the world can stop accepting US Debt because they don't think its ever going to be paid off. That means we're going to be printing tons of money to pay for our federal spending sprees, but that money is going to be dumped straight into the US domestic economy, which will cause domestic inflation to skyrocket.
The only thing keeping this from happening is our status in the world. China needs the United States to export Christmas ornaments and Independence Day decorations to. If Americans can't afford to buy stuff anymore, China won't have as many people to sell stuff to anymore. Likewise, the rest of the world relies too heavily on the United States for their security. If the United States can't maintain its foreign military presence, a lot of countries are going to get hosed.
Do you remember the phrase, "Too Big To Fail" when we were talking about the banking collapses? Well, the United States is "Too Big To Fail," too. If we collapse, the rest of the world is going to be in a lot of trouble. For economic reasons in the third world and security reasons in the first world, nobody can afford to let us fail.
