Thursday, October 08, 2009

Weak Dollar, Strong Dollar: A Love Story

There is something of a global finance mystery challenging financial journalists this week. Those of you about to yawn - well, I understand, but this is important. Politico, a top-notch blog page posts the story "Whodunit? Sneak attack on the U.S. dollar".

From the article: It began with a thinly sourced but highly explosive report Monday in a British newspaper: Arab oil sheiks are conspiring with the Russians and Chinese to quit using the dollar to set the value of oil trades — a direct threat to the global supremacy of the greenback.

It sent the dollar reeling on global currency markets and shot gold to record highs. While this is only the latest salvo against the dollar each previous dive bomb was followed by silence. No one believed anything of the sort would actually happen. Surely the American government would do what it takes to prop up the dollar, right? As always - follow the money.

Who benefits from a weak dollar? American exporters for one. It supposedly makes U.S. exports more attractive to foreign buyers. When one looks at what we export it starts to make sense. Decades ago America exported finished products made with the blood, sweat and tears of American labor. Not any more.

In 2008 capital goods was the largest category of U.S. exports. What are capital goods? Raw materials used to produce finished products. Industrial supplies was the largest growth category including fuel oil, other petroleum products , non-monetary gold, chemicals-fertilizers, and steelmaking materials. Other growth areas for capital goods exports were medicinal equipment, materials handling equipment, industrial engines, telecommunications equipment, and civilian aircraft engines. These are things that make up the finished products that are shipped back here from Asia (China) to be sold to you and me.

The second huge area for exports from the U.S. to the world is agricultural. Farmers (read Agri-business) just love a weak U.S. dollar. Neither farm work nor the extraction of raw materials is very labor intensive anymore. Now who do you think your government is going to favor? The down on his luck laborer? The overworked, under payed service worker? Or possibly agri-business and commodity exporters?

Don't count on Congress or this President to stand up for the dollar by getting government debt under control. The more the U.S. Treasury prints dollars the less valuable they become. Exporters love it. Overseas manufacturers love it. Your bank account and retirement savings - not as much.