What You Should Know About the Falling U.S. Dollar
With Steven Pearlstein
Washington Post Financial Staff Writer
Wednesday, May 14, 2003; 11 A.M. ET
The U.S. dollar has been steadily losing ground against foreign currencies since it's most recent high point in the summer of 2001. What does this mean for the U.S. economy? Should consumers be worried? Is a weak dollar good for U.S. companies?
In his column today, Steven Pearlstein writes: "In the short run, the good news is that the dollar's decline is giving a needed boost to U.S. economic growth by stimulating exports while encouraging U.S. consumers to switch to cheaper domestic goods. By putting upward pressure on prices, it will also reduce the risk of deflation. ... But in the long run, a declining dollar is nothing to cheer about. It erodes American standards of living by reducing what a dollar can buy, both at home and abroad." Read the full column.
Steven Pearlstein was online earlier today. A transcript of the discussion follows:
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Washington, D.C.: A weak dollar should help U.S. exports, however, the U.S. is importing five times the amount that it exports. And the trade deficit grew to the second-highest monthly rate on record in March. Should this alarm us? What are the ramifications other than continued job loss? And won't this be reflected in a downward revision to last quarter's GDP figures?
Steven Pearlstein: Lots of questions there. You're right to point out that we import more than we export so that in the short term, a falling dollar will reduce what our money can buy--or we insist on buying imports, leave less money left over for other things that may be produced here. On balance, however, the jobs and profit gains in the export sector in the short run is probably the biggest effect. The fact that the trade deficit is rising in the face of the currency decline is curious. What it means is that the deficit would have been higher still if not for the currency. Some of the trade deficit continues to reflect the higher growth rate here versus other countries, which is something not to worry about. But some of it reflects the currency misalignment that is now being corrected. As for GDP, the March number was about where the government had estimated when it released its first guess on first quarter GDP. Obviously, if the trade deficit continues to rise, it is a statistical drag on GDP and a real drag on output.
San Jose, Calif.: With a weakening dollar, won't that make it more difficult for the U.S. to finance the budget deficit? In turn, won't that require the U.S. to offer higher interest rates on its debt? Finally, since there is little or no inflation, could these higher rates lead to deflation or stagflation?
Steven Pearlstein: You're right too. There is a dynamic effect here where a falling dollar leads to a falling dollar. That's why economics is often about vicious and virtuous circles, dynamics that feed on themselves up and down. Weakening dollar makes it harder for the U.S. to finance its current account deficit, which in turn causes more people to flee the dollar and drives it down more. Indeed, another effect of all this is to drive up interest rates and if it gets bad enough, higher rates could cause stagflation. In this context, I'm not sure I'd worry about the inflation part of stagflation. More risk from stagnation plus deflation.
Piscataway, N.J.: Is the Euro currency backed by gold?
Steven Pearlstein: No, as far as I know.
Piscataway, N.J.: What should Americans do to restore confidence back in the dollar? Also do you suggest Americans buying gold bullion coins?
Steven Pearlstein: Not sure it is a matter of restoring confidence in the dollar so much as getting the dollar down to a level that makes sense. Gold has nothing to do with it.
Washington, D.C.: Would I be wrong to think that a falling dollar would tend to lead to higher inflation and higher interest rates? And in turn, that higher interest rates could be a big downer for the housing market that, to some extent, is being propped up by historically low mortgage rates?
Steven Pearlstein: You're right, too. Lower dollar is inflationary (or anti-deflationary, as may well be the case in the current environment). Rates, however, are not rising for reasons many people find curious.
Rockville, Md.: At what price in Euros do you think the dollar will bottom out? Is there any investment method that an individual U.S. investor can use to take advantage of the falling dollar?
Steven Pearlstein: Lots of ways to invest in the dollar's decline, starting with buying euros, or bonds denominated in euros, or putting money in European bank accounts, or buying European stocks or stock funds.
Independence, Mo.: I'm not only concerned with the shrinking value of the dollar, I am concerned with the growing federal deficit. I'm no economist, but I don't think the combination of the two can be good. It seems to me that the Bush administration's idea of speeding up the tax reductions is creating a larger looming problem down the road. Can the stimulus of this money have enough impact on the economy in the short term to justify what it means for the future? I'd be interested to hear your thoughts.
Steven Pearlstein: Well, you're no economist but you've got it about right. In the short run, a shrinking dollar and rising deficit are both useful to get the economy growing again. But in the long run, its not good and it would be better to get both things going back in the other direction, as long as they are driven by the economic fundamentals.
Arlington, Va.: What can the Japan experience teach the U.S. when it comes to currency valuation and fighting deflation?
Steven Pearlstein: The Japanese have been trying to drive down the value of their currency to keep their export sector going, which is the only source of economic growth for them now. It is a traditional mercantilist policy and it doesn't work very well. I suppose it helps their fight against deflation but their real problems are so fundamental and so rooted in their banking system and their business laws that all this other stuff really can't revive the economy there.
Alexandria, Va.: I'm not sure I understand this sentence from your column today: "By putting upward pressure on prices, -the falling dollar] will also reduce the risk of deflation."
Could you expand on that?
Steven Pearlstein: The dollar falls, which means cars imported from Japan, say, get more expensive. Those cars compete in the marketplace with American cars, and the American auto makers take the opportunity to raise their prices, too. So now the price of all cars goes up. They are the same cars as before, made in the same way. So that's inflation. And inflation, or rising prices, is the opposite of deflation.
Vienna, Va.: Would I be correct in saying that the weaker the dollar, the higher the prices appear to be for the American consumer? For example, will food, cars, clothing, housing, etc. become more costly?
Steven Pearlstein: Imported goods, or goods that compete in the marketplace with imported goods, will rise in price (unless the producers decide to swallow the currency change and take it out of profits).
washingtonpost.com: Your colleague, Robert J. McCartney, reports today that the soaring Euro is posing significant challenges to European economies. Two years ago, the Bush administration seemed to embrace a strong dollar policy. Why wouldn't European finance ministers do the same now? In other words, what is so different about the European situation today compared to the U.S. situation in 2001?
Steven Pearlstein: Not sure I understand the question. In Europe now, most of the economic growth is coming from the export sector. But a falling dollar means U.S. exports now look cheaper on global markets relative to competitive European goods. That means they will sell less, produce less, and have to downshift the only real engine of their economy. So they will be pushing for a statement that says the dollar has fallen enough, or too much.
Falls Church, Va.: Your column today sounds a lot like the Wall Street Journal's editorial from today: "Our response now, as four years ago, is to relax. The dollar was so strong for so long that its decline was probably inevitable, and in any case has happened at a moderate and thus manageable pace. We'd be worried if the dollar's weakness signaled renewed U.S. inflation, but long bond rates are falling and the price level is in check."
Steven Pearlstein: Indeed. But trust me: we didn't consult each other.
Harrisburg, Penn.: The unemployment rate has been increasing in recent years. With the declining dollar increasing demand for domestic goods, are there signs this increased demand are producing an increase in total domestic employment? If so, what appears to be the increased amount in jobs or, if the total number of jobs is not increasing, what else is happening in the economy that is halting job creation?
Steven Pearlstein: You're right to point out that the effect of the dollar on the economy is best described as "bigger" or "smaller" "than it otherwise would have been." In other words, there are other factors at work, too. The U.S. economy is weak because businesses are not investing and hiring and consumers are borrowing and spending a bit less than they were before. Why? Well, that's more complicated than we can probably get into here but you can probably guess at some of the reasons. And really, that's all you can do is guess.
Laurel, Md.: Any chance, in the future, of tying the dollar to the gold standard?
washingtonpost.com: Steve, several readers are raising the gold standard issue. It's been 30 years since President Nixon decided to float the dollar on the world markets. Is there any reason to reverse that decision?
Steven Pearlstein: Worrying about gold is just nutty. I know it sounds fetching but, trust me, it's just an idea that is inappropriate in today's global economy.
Washington, D.C.: Much has been written about how a weaker dollar benefits U.S. manufacturers seeking to sell goods in Europe and elsewhere outside of the U.S. For these businesses, they can employ complicated hedging strategies to cover potential foreign exchanges losses. How can a small businessperson cope with these currency swings? Are the same strategies really available to small businesses?
Steven Pearlstein: Yes, the same strategies are available to small businesses, although I won't kid you: they aren't cheap. The cheapest thing is simply to buy the euros now to be used later. But of course that assumes you have the cash to do it now. Other hedges, involving futures contracts and the like, are more complicate and more expensive, especially when done in smaller denominations.
Arlington, Va.: What impact does the Iraq situation have on the declining value of the dollar? I found it interesting that hordes of U.S. dollars were found stashed away in Saddam's coffers.
Steven Pearlstein: Not much.
Frequent European traveler, D.C.: I've cancelled my spring trip to Europe in part because of the declining dollar versus the Euro. What used to be a $90 dinner in Paris is now $110. Do you think the weak dollar will hurt the airline industry as more travelers postpone or cancel their European travel plans? Any sign of a return to the good old days when a dollar got you 1.1 Euros instead of the other way around?
Steven Pearlstein: Planes go both ways, so in theory the fewer Americans going east across the Atlantic will be replaced by more Europeans going east. In practice, it's bad for the U.S. airlines because Americans tend to fly American carriers and Europeans their own national carriers. And these are normally very lucrative routes.
Silver Spring, Md.: So the falling dollar helps U.S. exports. Silly question, but what are our top exports these days? What sectors of the U.S. economy have the most to gain from a weak dollar?
Steven Pearlstein: Agriculture, airplanes, high end machinery, some parts of the steel and metals businesses, autos, to name a few that come quickly to mind.
Bethesda, Md.: If the Bush admin. decides to prop up the dollar, what tools can it actually use?
Steven Pearlstein: Talk, buying up dollars, getting the Fed to raise interest rates are the traditional tools.
Washington, D.C.: Why the big difference between Snow's embrace of the weak dollar and his predecessor's strong dollar policy?
Steven Pearlstein: Snow didn't embrace a falling dollar. He said there was nothing to do about it. Since he added that caveat to the other part of the policy (we are in favor of a strong dollar), currency traders assume that the U.S. is less strongly in favor than it used to be. Maybe. But as Snow reminds, it doesn't matter because the government doesn't have that much impact on the dollar value, particularly in the medium and long term.
I just thought, by the way, of another thing the government could to prop up the dollar if it wanted. The Bank of China has recently been buying euros instead of dollars for its reserves. We might pressure them to go back to dollars exclusively. We also could pressure them to stop.
Herndon, Va.: How vulnerable is the dollar to the kinds of currency market manipulations that hurt certain Asian economies in the 1990s?
Steven Pearlstein: Not very. Too much of the world economy is denominated in dollars for anyone to have much of an effect on the long run value. That's why even intervention by government's doesn't work in any real way except changing the psychology of traders.
Washington, D.C.: Why aren't European bullish on America anymore? Your column today said it wasn't so much that people were pulling investments out of the U.S., they just aren't continuing to invest here at the same rate. Have we done something to turn people off to America? Can the government leaders who backed us in Iraq pass laws to require continued foreign private investment in America?
Steven Pearlstein: Yes, we've done quite a bit to turn people off. We sold them companies at greatly inflated prices. We sold them stock at greatly inflated prices. We sold them a currency at an inflated value. We conducted a war that they didn't approve of. And we've gone from running a record government budget surplus to a record government budget deficit. That's usually enough to get investors to reconsider their options.
Silver Spring, Md.: If the U.S. dollar becomes so weak, won't U.S. properties become much more attractive to foreign buyers? And if foreign buyers buy a lot of U.S. assets, won't that in turn help prop up the dollar?
Steven Pearlstein: Yes, that will happen. But by and large most won't do that kind of buying until they see the currency stabilize. If it's falling, they'll wait till tomorrow, when it will be cheaper. This is why markets overshoot in both directions.
Foggy Bottom, D.C.: I enjoyed your column. Wanted to point out the dollar has been declining against other currencies beside the Euro. Big movements in the Canadian, Australian, and New Zealand dollars, too. The Canadian dollar has appreciated almost 20 percent from just a few months ago, the kiwi has rebounded close to 35% from last year and the aussie is up 23% from a year or so ago. Hiking in Banff and quaffing Barossa shiraz are going to be much dearer, unfortunately.
Steven Pearlstein: Good point. And its been rising against the Mexican peso.
Washington, D.C.: The administration continues to say it supports a strong dollar policy. What's it doing to stop the dollar's slide?
Steven Pearlstein: Doing nothing. Can do nothing. Should do nothing under the current circumstances of slow, orderly decline.
Loudoun County, Va.: If the Fed boosted rates to prop up the dollar, wouldn't that have a huge negative impact on the domestic economy? And with rates so low, is the Fed sort of trapped -- it can't really cut rates any lower to stimulate the economy, and it can't raise them for risk of doing greater damage.
Steven Pearlstein: You got that right.
London, Ontario: Steven,
As a Canadian exporter to the U.S., we are also punished by the weak dollar, as our goods are more expensive for Americans to buy. Can you give a prediction as to what level you see the two exchanges leveling off at, and when you see them hitting that level.
Steven Pearlstein: In general, its best for journalists not to predict the movement of markets. I broke that rule in this column by saying the dollar was still overpriced and it would probably fall further, but I was careful not to say when and how much. This falling dollar is bad for Canadian exporters to the U.S. but good for Canadian consumers and exporters to the rest of the world.
St. Louis: Of course the dollar is in a free fall, with stupid trade deals, good paying union jobs leaving the country, what do you expect? We are no longer a manufacturing nation. Would you invest in a new factory here? Only to compete with a third-world slave labor country? Plus the record spending of a government out of control, not to mention corruption at the executive offices of Wall Street and other large companies. We are in a race to the bottom!
Steven Pearlstein: That's one point of view. I just don't happen to agree with it. One reason good paying union jobs were leaving the country was that the currency was overvalued. If that is corrected, then you should see some of those good union jobs coming back, at least to companies still around to take advantage of it.
Concord, Calif.: How will we compete with China and other producers of lower quality products even with cheap dollars? The way it looks to me, the world doesn't trust us any more and are trying to get way from doing business in dollars. Are we in for a secular decline on the dollar with the E.C.U. and the rest of the world ?
Steven Pearlstein: No.
Steven Pearlstein: Thanks, folks. See you next week I hope.
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