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Weakening Dollar Will Fuel the Misery Index

By Neal Asbury
Thursday, 05 May 2011 08:20 AM Current | Bio | Archive

While the country has been rightfully fixated on domestic economic concerns, the U.S. dollar has fallen to its lowest point since 2008.

The dollar has dropped on average 8 percent against other major currencies. This is one obvious manifestation of our $14 trillion federal debt that has also lead to Standard & Poor’s to downgrade the U.S. debt outlook.

This hasn’t shown up on the radar screen of most Americans … at least yet. The price of goods imported into the U.S. will continue to rise. Everything from cars and clothes to electronics and appliances will cost more at retail. Worse, the weakened dollar is one big reason for the rising price of gas at the pump and for rising food prices.

The administration claims a weakened dollar means the price of American goods are cheaper for foreign consumers, thereby a catalyst for expanding exports that would create much-needed jobs at home. This would in turn begin to improve the current U.S. merchandise trade deficit, which stands at more than $500 billion. Sounds plausible … but excessively superficial.

What the administration fails to understand is the problem facing American exports is not the value of our currency. The problem is access: American exporters don’t have the same access to foreign markets that foreign manufacturers have to our market. The world is full of barriers, distortions and manipulations aimed squarely at the American entrepreneur. It does not matter how weak our currency is, until the Obama administration understands this, nothing changes and our competitors will continue to have their way with us.

U.S. tourists traveling to Europe and other countries this summer will face sticker shock for everything from a latte to a taxi ride. They will quickly find out the “Almighty Dollar” isn’t what it used to be. Our declining currency mirrors the declining global confidence that the U.S. can get its economic house in order.

The most surprising aspect of the weakened dollar is that there is no sense of urgency coming from Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and other administration officials. The reason is that while the drop in the value of the dollar has negative implications, it actually makes the deficit figures look better. The less the dollar is worth, the lower the deficit level appears to be. It’s another way that the administration is moving decimal points around to hide actual debt figures.

The other real danger is that the painfully slow recovery will stop dead in its tracks if the weakened dollar leads to inflation. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in March 2011 on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported on April 15.

During the last 12 months, all items on the index increased 2.7 percent before seasonal adjustment — the largest increase since December 2009. The energy index has now risen 15.5 percent during the last 12 months, with the gasoline index up 27.5 percent. The food index has risen 2.9 percent with the food at home index up 3.6 percent. The index for all items less food and energy has increased 1.2 percent with the shelter index up 0.9 percent.

A quick trip back to 1997 finds a more pragmatic approach by a Democrat administration to a weakened dollar. Then Treasury Secretary Robert Rubin suggested that relying on a falling currency to spur exports isn’t a “sound approach” and urged economic policy changes that would strengthen the dollar.

Instead, he advocated: “Policies should be focused on curbing government spending, raising revenue and addressing the soaring cost of government programs such as Social Security and Medicare” while “improving education, research and infrastructure are critical to increase productivity.”

What a difference in approach. As we see the price of a gallon of gas rise to $6.00 this summer, maybe the weakening dollar will get the attention it deserves from this administration.

A weakened dollar means inflation as prices for everything increases and higher interest rates that are needed to attract foreign buyers for our rapidly increasing debt. Add this to our unemployment rate of approximately 9 percent with no reason to believe it will improve anytime soon and you have the perfect storm.

Are we beginning to feel the initial gusts of the misery index?

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While the country has been rightfully fixated on domestic economic concerns, the U.S. dollar has fallen to its lowest point since 2008. The dollar has dropped on average 8 percent against other major currencies. This is one obvious manifestation of our $14 trillion...
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