Tags: economy | dollar | china | singapore

The Real Numbers Behind a Strong Dollar

Monday, 02 February 2015 11:52 AM Current | Bio | Archive

We seem to live in a fool’s paradise. While practically all industrial countries have devalued their currency in order to improve their economy (Singapore is the latest country doing it, with China poised to follow), our government seems to take no action while our economy gets affected more and more, as time goes by. Consider this:

Since most U.S. multinational corporations derive about 70 percent of the earnings from abroad and assuming an average 20 percent of foreign devaluations, future earnings will therefore shrink by 14 percent on their U.S. balance sheets. A fact that will become apparent to Wall Street in the second quarter of 2015.

Secondly, there will be a great effect on U.S. exports. Here is the question: Will a German purchase a Buick that suddenly cost 25 percent more? On the other hand, an American buyer will gladly pay 25 percent less for a Mercedes which he previously could not afford.

Such imbalance between imports and exports will add about $100 billion to our present $400 billion current account deficit. Remember, all these yearly current account deficits will add to our $18 trillion national debt.

Admittedly, there is some offset since we have to pay less for imported oil. However, since most of foreign oil wells are owned by U.S. companies, this is again offset by the reduced profit margins on the imported oil.

One might wonder, why do countries reduce the value of their currency. Here is an answer: Take Japan for example, they now have to pay over 25 percent more for imported energy, since the price is posted in U.S. dollars. However, they don’t mind doing this as long as they can export more finished goods, since there is at least 50 percent of value added between the oil and a finished product. This “value–added” is what ultimately aids the Japanese economy.

The argument has been made, that the great reduction in the price of oil has been a boon for the U.S. economy. It certainly has been good for the U.S. consumer, and therefore for the companies that produce consumer staples. Yet, looking at the overall picture, it is a zero-sum game.

The money that goes into the pockets of the consumer is offset by the loss in revenue by the U.S. oil companies and by the lost wages of the laid-off oil workers. Finally, the U.S. oil price has no effect on the value of the dollar vis-a-vis foreign countries.

While the effects of the currency imbalance works itself gradually into the earnings of our companies (we already see the beginning of earnings reductions), any prudent investor certainly should take note of what is happening.

Hans Baumann is a licensed engineer in four states and a member of Sigma Xi, the Scientific Research Society. He is an adviser to the dean of the University of New Hampshire Business School. Baumann has published manuals on valves and was a contributor to many works including the "Instrument Engineers' Handbook" and the "Control Valves Handbook." He has also self-published several books on business management and German history. His book "Hitler's Fate," suggests that Adolf Hitler did not commit suicide and survived World War II. For more of his reports, Go Here Now.

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While the effects of the currency imbalance works itself gradually into the earnings of our companies (we already see the beginning of earnings reductions), investors should take note of what is happening.
economy, dollar, china, singapore
Monday, 02 February 2015 11:52 AM
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