Weak Dollar

Let's talk about a "weak or "strong" dollar, and perhaps get a bit of understanding as to what the term means, and the effects it has on all of us. Terms such as 'weak' and 'strong' are bandied about by economists on a daily basis, and few of the public know what it means.

A weak dollar, is weak in comparison to other paper currencies, and a strong one is also, compared to other currencies. (They're all WEAK, since none of them are backed by anything, and are mere pieces of paper with ink on them.) If everything one buys is produced and grown in America, a weak dollar has no effect on the price of goods purchased, except for inflation. The dollar is our currency, and is circulated about the United States, to buy and sell stuff. If every pound of hamburger, nail, board, or car, were 100% mined, grown, and manufactured in America, a weak dollar would mean nothing, aside from inflation, which is different than a weak INTERNATIONAL DOLLAR. Unfortunately, just about everything we buy is produced abroad. Hence, a weak international dollar means a lot.

If the US dollar is weak, compared to say the Japanese yen, then the Japanese goods will cost more to purchase here, and it will harm Japanese exports to us. By the same token, if our dollar is weak, compared to the yen, then the Japanese will find that American goods are cheaper for the Japanese to buy, and American exports will benefit. The yen is not linked or locked to the dollar, but has a market of its own.

The euro was at one time 88, and now is 125. This is a superb way to measure the dollar's strength. Prices of both the yen and euro are ways to find out if the international dollar is strong or weak, compared to those currencies. If the euro is 125, the dollar is weak. The same with the yen. The less dollars it takes to buy a foreign currency, the stronger the dollar is, and the reverse.

As an illustration, take a consumer good, such as butter. A couple of years ago, butter was $1.25 a pound, and now it is $4.00. This means the dollar is weak, but not compared to other currencies. It is weak because of inflation. If a home goes from $125,000 to $300,000, it has nothing to do with a weak international dollar compared to the yen or euro, but it is because there are so many trillions being printed, that they lose their value, due to huge supplies. This is inflation. A weak international dollar, compared to other currencies, might certainly be caused by inflation, and for all practical purposes is caused by inflation, among other things. The various currency strengths and weaknesses are caused not only by inflation, but by opinion. If the dollar loses favor, because of domestic inflation, foolish foreign policies, deficits, runaway government spending and size, the world's OPINION will cause a currency such as the dollar to lose favor and become weak. America has filled all of the above requirements to lose favor and have a weak currency.

Weak dollars can be of a great advantage to the US in one way, and a definite drawback in other ways. The advantages of a weak dollar, are that American made and grown goods and foods, are cheaper for foreign nations to purchase, so it helps our exports and trade deficit, which currently are literally out of control. US manufacturers, who export things, love weak dollars, and foreign nations who sell us stuff, hate weak dollars, because it makes their goods too expensive for Americans to buy. Get it so far?

Now about the Chinese. They have two currencies, but that is too complex for this piece, so we'll just speak about the "Chinese currency," meaning the yuan. The Chinese have linked their currency to the dollar. The ratio is 8.28 to 1. If the buck goes up or down, and so does the Chinese currency. Why would they do that? Easy. Because prices of their goods are unaffected by the dollar's rise and fall. If the dollar goes up or down, so does their currency. This means that they are unaffected by the dollar's strength. By the Chinese locking their currency to the dollar, it is just like they are one of us, and no matter how far up or down the dollar goes, they can still sell us stuff on the cheap, because of cheap labor, less taxes, and government gobbledygook. By linking their currency to ours, they have assured themselves that their largest market is unaffected by the dollar's strength. We are their biggest customer, thanks to China Marts, China Depots, etc. If they allowed their currency to float, as does the euro or yen against the dollar, they would be placing their huge industrial might at risk on a currency's strength or weakness. As it is, they can go on like this as long as they value our business, and don't get caught in a vice because of other currencies going much higher against the buck. The Chinese sell to other nations too, and there is the catch. Their dollar linked currency makes it a grand thing for selling to us, but it might possibly harm their trade with other nations, since the euro is strong, and their currency is weak, thanks to being linked to the dollar.

If the Chinese decided to let their currency float, depending on how strong or weak it turned out to be, compared to the euro for instance, it might be a wise move. They'd risk their American trade, but so what? Our factories are long ago closed, and we can't begin to make what we consume. Our manufacturing ability is so pitiful, that we must buy most of our consumer goods from China. It is said that 39% of the food we eat, comes from abroad. We are stuck, if the Chinese allow their currency to float, regardless of how it floats. I believe they might eventually do this, but not for now, as they are using their dollar profits to buy oil, steel, gold, and a host of other things. China, thanks to our dollars and their quarter an hour labor, has watched us self-destruct and become hopelessly dependent on them. I refuse to buy Chinese goods if I can possibly avoid it, but America in general, thinks it is swell, because it makes their dollars go further.

Weak dollars have a very dark side to them, and especially when our deficit is so large. We have to sell our debt to stay afloat, because our government spends over a billion dollars a day more than is taken in by taxes. We "sell" our debt to whoever will buy it, and pay interest to the buyers or borrowers. If the dollar continues its slide, and interest is low, foreign nations won't buy our debt. If they won't buy our debt, and of late they have been buying less and less, what is there to do? Monetize it, that's what. In other words, the fed prints the debt instruments, and then buys them itself, meaning that the currency supply roars up. It is just another way of saying, "print the dollars to pay the bills." More and more of our runaway debt is being monetized, which results in more and more, weaker and weaker dollars in circulation. This means that they are worth less and less, and buy less and less.

I believe there may be a race to see whose currency can be debased the most. Slowly enough so that the public doesn't get alarmed. If it is happening already, and I think it is, eventually they'll all be worthless! The reason being, that the weaker the various currencies are, the easier it is for the weakest to export, and sell to other nations. Some items are priced in a "reserve currency," which now are dollars. These include gold and oil, even though they can be bought in any currency. The obvious result, is that gold and oil will go heavenward, in dollars, and they make an excellent investment or hedge, against the dollars' total failure. Honestly, it appears to me as if America is going the way of the Germans in the 1920's. They were forced to pay reparations for the damage they caused in WW I, and they simply printed their way out of debt, causing their currency to become worthless.

America is printing its way out of debt on a daily basis, just like the Germans did, because of the politicians' voting endless largess from the public treasury, pointless wars, and an ever enlarging government. No sane person wants any of the things mentioned in the previous sentence, but we are in the minority, and we can't throw the bums out of office with our votes. The only thing we can do, is stay out of currencies if we have a surplus of them, and invest the surplus in anything tangible. The most sensible, tangible, has to be the items regarded as real, honest, and unquestionable "money" throughout the thousands of years of world history. They are gold and silver. Butter requires a lot of refrigeration, and oil a lot of storage. Most tangibles require huge storage, risk, and difficult sales and delivery when sold. Gold and silver are compact, beautiful, fungible, easily bought and sold, have no registrations or titles, and are a pure delight! Try them…you'll be ever so glad. Protect yourself.

October 15, 2004

Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com