People have been freaking out lately by a weak US dollar. I’m here to tell you it doesn’t really matter. Did you know that 60% of Americans have never left the country and less than 25% of Americans own passports? Most of the 40% who leave come back, so it’s only a temporary amount of time when their purchasing power may be relatively hurt.
An even better statistic states that only 20% of Americans speak a foreign language. Hence, where the heck are the 80% of Americans going to go if they can’t communicate with the locals? Ok, so they may understand what “I want a double quarter pounder with cheese please” in English means, but we aren’t going very far if we can’t speak another language. Sure a vacation is fine, but it’s not like we Americans are suddenly going to relocate overseas and establish roots.
If you are an American who makes a US$ denominated salary, buys US$ denominated assets like property, consumes Levi’s jeans, and never plans to leave the country, what are you freaking out about? The US Dollar can depreciate by 90% against the Euro, and it still wouldn’t really matter. The government is crushing our currency on purpose and you know the government would never, ever, ever do anything to harm the people they serve.
INFLATION FEARS OVERBLOWN
Economic theory states that for every new dollar printed, inflation will rise by a commensurate amount, eventually. You can read more about the IS/LM model at work here, but it’s boring as hell. The issue is that the output gap is running at 7-8%, so there’s still a ton of slack and you don’t have to worry about inflation.
Yes, it might suck that your BMW becomes prohibitively expensive in the short run, but in the long run, if European and other foreign producers desire to sell to the US, they will find ways to lower their prices accordingly. In the meantime, shouldn’t you be buying American in this economy anyways?
You might argue that so much of the input costs of the final good comes from foreign labor and parts. That’s true, but all you have to do is move down the cost curve in your consumption patterns. Instead of buying the TV from Best Buy, you go to Costco. Instead of buying the couch from Pottery Barn, buy from WalMart.
GOOD FOR EXPORTS
A weak USD helps US exports, making our goods cheaper to foreigners. If we can’t sell goods at home due to a weak economy, what a blessing it is to sell to foreigners! We dump our inventory on them, and make some money in the process! The problem is the US is a relatively closed economy with exports as a % of GDP hovering at 11%, or #157 in the world compared to Singapore, at 173%. In this regard, a weak dollar only helps a small percentage of the economy, but also argues the point that we are a self sufficient country.
The most interesting exchange rate competition lies between the Korean Won and Japanese Yen. Over time, you’ve seen Korea’s export economy resemble that of Japan’s export economy. Toyota is matched up against Hyundai, while Sony battles with Samsung Electronics. Korea’s export manufacturers are eating a lot of their counterpart’s bento boxes recently!
FUNDING OUR DEBT
Many fear that if the USD continues to depreciate, foreigners will stop funding our debt (buying our treasuries). That could be true, but frankly, foreigners like the Chinese are STUCK with over $800bn in US treasuries! If they stop buying our pitifully yielding 3.3% 10-year Treasuries, their US Treasury portfolio is going to tank, and they are going to lose billions more! Would you chop off your arm if you only had to chop off your pinky (accept lower rates)?
China can’t help but not continue funding our debt because it is one big “virtuous” cycle. Americans need cheap money to leverage ourselves to buy cheap Chinese goods (we imported $340bn worth of Chinese goods last year), and China likes selling their cheap goods to us. The world knows Americans are addicted to consumption and in a way, foreigners are like junket Casino operators who extend credit to addicted American gamblers. One day we will have to pay back the loan, or face a big man in a dark alley ready to break our knee caps. But, for now, the USD will remain the reserve currency of the world as foreigners can’t live without our consumption power.
LET’S TANK THE US DOLLAR TO OBLIVION!
Let’s be very clear here. The fear of a weak USD stems from the protectionist mentality of America’s business and political leaders whenever a recession hits. A weak currency invites “foreign invaders” who end up purchasing more of our assets, goods & services which for some reason folks don’t like.
There’s also a pride issue for those who really care about our currency. We’re embarrassed when we see that the USD no longer buys 100 Yen to the dollar. But, who cares? Honda Accords are made in the US anyway! A weak US dollar is a symptom, not a problem. Get over it and start chanting, “USA, USA, USA!”
Summary: Most Americans only speak English, seldom ever travel to a foreign country, and can’t afford fancy BMWs and other foreign cars because they don’t make at least 10X the cost of the car. As a result, a weak dollar is actually good for USA. Let’s go export industry!
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Updated for 2019. Let the bull market continue with stocks at all-time highs!
About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
You are right, American do not worry about weak dollar, if we compare dollar with other countries such as India where US is hoping bulk deals and Indian rupee is facing all time low against US dollar. If we see the exchange rate of dollar to rupee amid falling global market due to crude oil and COVID-19; the 1 USD to INR stood 1$=76.61. I dons’t think there is no need to worry.
If the dollar is weak the cost of imports increases. USA imports many things from the Far East, all of which will increase in price, creating inflation in the short to medium term. As the US no longer has the skills to make many things and couldn’t hope to catch up due to the immense amount of technological advances would be US manufacturing workers would have to assimilate, it is very unlikely to ever get that manufacturing expertise back, even at much higher prices re imports due to a weak dollar. What will happen is the hollowing out and impoverishment of USA as people can afford less and so buy less.
Re China, the only reason it buys US treasuries is as a dollar supply to to convert back into renmimbi in order to aid Chinese exporters. This works whilst ever the USA is a big consumer of Chinese products. However, the far East has been growing at an immense rate and does a lot of trade within itself. It is fast approaching the situation whereby it won’t need the USA anymore. Given the aggressive attitude of the USA towards China and the indifferent attitude of the EU towards China it will likely favour the EU over time and dump it’s US Treasuries when it deems it can afford to do this. When it happens the US dollar will collapse, import prices will go shy high and as the US lacks the skills to provide substitute goods for those lost in imports the USA will become a third world country.
This is likely to happen over the next 30 years – there is nothing good to come from a weak dollar over the long term.
Personally, I don’t care about the weak USD for travel reasons and as an equities investor, of course it’s been adding a few percentage points to earnings each quarter for the multinationals I own. However, to think this trend can continue forever with no consequences is missing a major point – we do import many commodities – oil especially. See how much people were freaking out over $4 gasoline? What do you think $6 oil will do to the economy? High gas prices are a tax, no way around it. You’re not for raising taxes as a way to boost the economy, right? We’re also seeing food prices increase, clothing, and our much-needed electronics. Eventually, we do and will see inflation and slower growth.
Oil will only go to $6/gallon if the economy is strong enough to bare. I see high oil as a signal that the economy is strong, and not a signal for bad things to come.
So is the joke now, “If you you owe China a million dollars and can’t pay you have a problem, but if you owe China 800 Billion dollars and can’t pay then China has a problem?”
All joking aside, as a Canadian that lives near the US-Can border I can say with certainty that the towns close to the border are LOVING this dollar rate. Also, as a Canadian consumer I am loving it as well. Not only to get access to a much broader market of goods, but Canadian business now need to compete directly with their American counterparts and lower prices. It also makes American blue chip stocks ultra-attractive right now, because we are essentially getting them at a discount (relative to ‘average’) due to our dollar being at par with the USD.
We need you to cross the border and not only buy our stocks, but buy our real estate!
Actually a lot of people I know have been doing just this. Florida and Arizona have been popular options for many older people looking to become snowbirds. Personally, I have been exploring the Vegas real estate market. I think in terms of an investment it has to much of a pain-in-the-ass factor for me, but if your looking to build a home to live in for a large part of the year I think this will be a once-in-a-lifetime opportunity for Canadians.
Come to San Francisco and buy. It’s the most beautiful city in America! :)
I believe they are printing money in order to bail out banks and corporations. Inflation is also hurting food and gas prices. Food prices around the world are rising and contributing to the instability in the Middle East. We import more than we export. That won’t change until wages in developing countries are similar to those in the US. Fat chance on that happening any time soon. If you think the Gov’t will actually reduce debt then you are dreaming. The Healthcare bill will be a massive burn on the debt. Medicare, social security, and defense will not be cut. Gov’t programs will only grow and the debt will only rise. Nice idea, but I don’t buy it.