Weak Dollar: Bad for America

How many people reading this article studied economics in school? Second question how many understand the dangers of a poor economics system? Well we all can agree that, the currency in the United States is the dollar, and it is circulated throughout the country for consumption and investing purposes. There is a difference between a weak dollar and a weak international dollar. For instance, if every product such as plates, cars, or jewelry were 100% mined, grown, and manufactured in America, a weak dollar would mean nothing, aside from inflation. Unfortunately, many of the products we buy are produced abroad. This means that with a weak international dollar, there will be higher import prices, which is bad for the U.S Economy.

During the Clinton administration, our currency became the strongest in the world. The strong currency did a number of things. First, lowered prices of foreign goods for US consumers, second, the strong currency kept inflation low, and lastly, it lets U.S. investors purchase foreign stocks/bonds at "lower" prices. When the Bush administration took over, a few economic changes were implemented to help pick up the economy after the terror attacks, which caused a weak dollar. Now, a weak dollar also has its benefits such as increasing exports, maintaining growth and employment (Feldstein). However, the negative effects outweigh these benefits.

Maintaining growth and employment is valuable, but a weak dollar left unchecked can hinder economic growth. The American dollar has been weak for eight years. A weaker dollar translates into a cut in the real spending power of American consumers. In effect, it reduces real income. In the article, "New home sales plunge records 26 % in 07", Patrick Rucker argues that housing sales and the housing markets are in danger. Kurt Karl, chief US economist with Swiss Ree in New York, states that "It's a pretty big drop and it clearly shows the housing market continues to deteriorate." This relates to the decreased value of the dollar because, with the economy in its current state, less Americans are able to purchase such expensive investments (like housing) under a strict budget. Evidently, this is what is happening to our current mortgage market.

Another reason why a weak dollar hurts the economy is it weakens the role of the U.S. dollar as the world's currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining? Our deficit is so large; we have to sell our debt to stay afloat. We "sell" our debt to whoever will buy it, and pay interest to the buyers or borrowers. If the dollar continues its slide, and interest is low, foreign nations won't buy our debt. If they won't buy our debt, and of late they have been buying less and less, who are we going to count on? The U.S Government already spends a lot more funds then is collect in taxes.

The third point I would like to address is that a weaker dollar is inflationary since it increases the cost of imports. Oil for example is one of today's principle issues with the slight indication of stagflation. The dollar has traditionally influenced the price of oil. Since the dollar is weak, it costs the U.S much more for oil than it would for the Europeans. According to the Reuter's article "Oil Rises after Plan Fails to Ease Economic Worries", Robinson explains, since the Euro is worth more than the Dollar, oil is a little bit more expensive for us. Don't get me wrong, the oil prices are increasing, but we pay $90.57a barrel while the Europeans are $89.23 a barrel (Robinson).

It is economically unstable to have a weak currency for a long time period of time. The negative effect of the weak dollar has hindered our level of economic power in relation to Euro and Canadian currencies. The value of our national currency should be taken seriously to apply the correct policies to ensure a stronger dollar and therefore a stronger country.

Citations:

1. Feldstein, Martin. "Growth with the Weak Dollar." Financial Times (2007)

2. Neild, Barry. "Recession fears stalk Davos meeting." Jan 23, 2008 .

3. Robinson, Matthew. "Oil rises after plan fails to ease economic worries." Jan 18 2008 .

4. Rucker, Patrick. "New Home sales plunge record 26 percent in '07." 6:51pm EST Jan 28, 2008 .