If you’re anything like me, you’ve been hearing about the declining dollar everywhere. I was even in McDonald’s last weekend and it was on TV there. What happened to good old American football on a Sunday morning? Talk about the declining dollar is on the radio when I drive into work…and when I drive home. Sometimes, I feel like I’m listening to chicken little (of course sometimes I think I should just turn on some music). That got me to thinking, “is the sky really falling?” So, I did some investigating.
Here’s what I found out:
There can be good and bad implications of the falling dollar, I guess it all depends on your perspective, or the rules of economics (whatever they may be…).
The scary pundits are the ones that I hear most often; and they are saying that the declining value of the dollar means:
- Inflation is coming – if the dollar is worth less, then everything is going to cost more, which is the definition of inflation. This will be true for imports, but for goods and services created in the US, this is more of a long term expectation. The fed monitors inflation closely and hasn’t seen much evidence of inflation rearing its ugly head yet. They have actually mentioned being worried about deflation.
- Increased Fuel Costs – A declining dollar means that internationally traded commodities, like oil, become more expensive. Higher oil prices lead to higher gas prices and then…inflation or worse, stagflation, if the price of oil rises so high that it slows the economy. We last saw stagflation in the late 70’s and early 80’s…ouch!
- Reduced Demand for US Bonds – If the dollar gets too weak, foreign investors may refuse to buy U.S. government bonds, forcing interest rates up and possibly applying the brakes to any recovery.
- The dollar will lose its popularity – Compared to other world currencies, the dollar will lose it’s popularity and people will stop investing in the US and place their money elsewhere.
The other side says, “it’s not scary it’s a blessing!”
There are a few experts that say the decline in the dollar is a good strategic plan and will benefit the USA.
They say a weaker dollar will:
- Increase Exports – Lowers price of US goods overseas, hopefully reducing the trade deficit and increasing our economy with foreign purchases. This is a strategy that China used in their rise to economic power. They have been accused of keeping their currency low for many years to keep their goods low priced and to generate an influx of cash from the rest of the consumer world.
- Shift purchases towards goods made here in the good old USA – A weak dollar will raise the price of goods from outside the country and should make the price of American produced goods more attractive in comparison. This will also help stimulate our economy out of the current doldrums.
- What declining dollar??? – The dollar’s decline is a good media story, but it may be overstated, it is about the same value as 14 months ago. Then, the world financial markets fell into ruin and the world engaged in a “flight to quality” run by investing in the US, still the world’s most stable economy. This drove up the value of the dollar. Now that the world is recovering, money is flowing back out of the U.S. taking us back to where we were 14 months ago. Combine the recovery of the rest of the world and our lower dollar allows us to use other countries buying power to stimulate our own economy.
It’s all part of a balancing act, when we reach one side of the pendulum, the forces it creates help swing us back the other way. For what it’s worth, I believe we are in the middle of a new shift and what has people scared is a belief that the dollar will plummet with no end in sight. The benefits that the weaker dollar creates will help mitigate its effect and eventually swing us the other way. As long as the economy still needs stimulation, mortgage rates should remain low, but once it heats up, rates will rise to keep inflation in check.