The U.S. economy is in the doldrums and, although the pace of job-loss appears to be slowing, the number of Americans claiming unemployment benefits is still at record levels – 6.35 million as of April 25. Further job losses can be expected in the months ahead as consolidations and reorganizations continue. Examples include:
- GM and Chrysler’s plant and dealerships closings. Suppliers to the auto companies that will be impacted will also shed jobs as a result.
- Production capacity cuts at Boeing, one of the last bastions of the American manufacturing industry, as both U.S. and foreign airlines opt to push back the delivery dates of aircrafts on order.
- Continuing declines in employment rolls in banking as the recent voluntary and forced acquisitions move forward and duplicate positions are eliminated.
Many analysts expect the jobless rate will hit 10 percent by the end of this year.
Despite all these troubling signs, the U.S. dollar has stayed strong, regardless of how many interest rate cuts we’ve witnessed and how big the deficit has grown and how much more money the U.S. Treasury has printed. As a matter of fact, the U.S. dollar grew stronger as the global economic environment became more unpredictable. Why? Simple – it is the world’s reserve currency.
Unfortunately the status of being the reserve currency works against America’s interest in such difficult times. The artificially strong dollar continues to make it cheaper to import goods from foreign countries than to manufacture locally. While it may be true that American businesses’ productivity is higher, cheaper labor and lax controls (on things such as environmental impact) in developing countries make it hard for American manufacturers to compete on a cost basis. Fiber optics, high speed networks, and expanded bandwidth that enabled and accelerated the migration of technology and back-office jobs to lower costs countries will remain in place and keep those jobs out of the U.S.
To get back on the track of economic growth, we need to see a gradual but significant decline in the value of the U.S. dollar. Here are some reasons why:
- A weaker dollar will make imports and foreign labor more expensive, reversing the trend of both manufacturing and service job migration to off-shore locations.
- Conversely, a cheaper dollar would also make American made products more competitive in the world market.
- Foreign businesses (especially those in the EU) would want to invest in the U.S. to take advantage of a highly trained and productive work force.
- Subsidies to the agricultural sector would no longer be required as U.S. agricultural products are more competitively priced on the world market.
- Tourism would boom as visitors from other countries find U.S. destinations more affordable.
The counter argument is that America has become so dependent on imports that the higher prices on imported products will result in inflation and will ultimately hurt consumers. That may be true in the short term and for certain products – in the longer term, the U.S. can be largely self sufficient in many areas. Inflation is less of a threat until the unemployment numbers have declined significantly and liquidity has returned to normal. Beyond that, the Fed has plenty of room to aggressively raise interest rates to prevent run-away inflation.
Sure, we won’t be buying as many imported toys and gadgets but that’s not a bad thing. We’ve become overly reliant on toys (children and adults alike) to make us happy. The growing rate of obesity is not just from junk food and over-eating – it is also from a lack of exercise and time away from toys that do not help us burn up all those extra calories.
The best part of a cheaper currency is that businesses will not have to cut wages or staffing to be cost competitive. Consequently, the bleeding of jobs to offshore locations will stop. As American products, priced in U.S. dollars, become more attractive in the world markets, manufacturing and other jobs in the U.S. will grow again.
Crude oil and gasoline prices will likely go up as oil producing nations demand more dollars for each barrel of oil they pump out of the ground. However, the higher prices will have a positive long term impact as it will provide us with a greater impetus to move forward with the drilling for new oil-fields in addition to using alternative fuel and energy sources that are cleaner, greener and more sustainable.
Strange as it may sound, we may not have to take more specific action to bring the value of the U.S. dollar down. The yield on U.S. dollar Treasuries is practically down to zero and the massive amounts of money that the U.S. government has injected into the economy to help soften the impact of the downturn and to stimulate growth and job creation will, in the long run, deflate the value of the U.S. dollar. Diabolical…!
What we need to see happen is a resurgence in the markets’ confidence that the economy has bottomed out and a recovery is likely, albeit somewhat in the distance. Hopefully, the trend of the Dow in the past two months is a sign that the present administration has done the right things to calm a nervous market and to rebuild a confidence that had been badly shaken by the sub-prime mortgage meltdown and by Madoff’s multi billion dollar Ponzi scheme.
SIDEBAR
If you’ve been watching both the DOW and the currency markets, you’ll have seen the dollar’s strength moving in the opposite direction – each time the U.S. stock market is doing well, the U.S. dollar is weaker. Just as investors flock to the U.S. dollar in their “flight to safety” during uncertain times, they become less risk adverse in a more upbeat market and invest in currencies with the expectation of a higher rate of return.
Illustration 1 below shows that between September and December 2008, the drop in the Dow was closely mirrored by the drop in the exchange rate of the Australian Dollar (meaning that the U.S. Dollar got stronger). As the Dow began its recent climb starting in March, so has the value of the Australian dollar.
Illustration 2 below show the same movements in the Dow versus the Euro. The trends mirror each other but the relationship is not as tight as in Illustration 1 above as the Euro is less of a “speculative” currency.
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