Why A Weak Dollar is Bad

Hello All,

As a bit of a departure from our usual fare of nuts and bolts personal finance topics. For this posting we’re taking about the importance of the US dollar as it relates to other currencies.

Financial Samurai is a very good personal finance blog associated with this website. They recently posted an article on why a weak US dollar does not matter. We respectfully disagree and wanted to tell our readers why.

First, we’ll go over the reasons Financial Samurai gave for desirability of a weak dollar. These include:

1) Inflation fears are overblown
2) A weak dollar is good for exports
3) Weak dollars help to fund debt
4) Costs of weak dollars are felt only by travelers

We address each of these arguments in turn:

1) Inflation fears are overblown. Financial Samurai is basically saying that concerns about inflation are overblown. We think that FS’s conclusion is too optimistic. Why? Milton Friedman classically argued that inflation is always and everywhere a monetary phenomenon. This means that inflation is caused at least in part by a large supply of money and not enough economic activity to raise demand. Given the titanic amount of stimulus the Federal reserve has pumped into the economy, we feel there is a fair chance the US will experience some inflation once interest rates increase. There are simply too many dollars in circulation for this not to happen.

2) A weak dollar is good for exports. FS is right. However this is increasingly unimportant. Without a doubt, a weak dollar is good for exports. However, exports have been declining over the past 15 years. For example, since 1991 the US balance of payments – an indicator of payments for goods exported – has been negative and getting worse. So any benefits that come from a weaker dollar are mitigated by the fact that we aren’t selling as much as we used to. Don’t believe me, check out some data from the US census below:

3) The weak dollar helps to fund our debt. This is the worst part of the argument for a weak dollar. Instead of advocating for a policy which allows us to carry large of amounts of debt policymakers should consider ways to reduce expenditures and prevent further debt growth. Larger amounts of debt at the federal and state level puts pressure on government budgets. This can cause higher taxes. Thus, with all things being equal, more debt means Joe and Jane average have to pay more in taxes.

In addition, more debt can impact Americas global position. A major creditor to the US is China. With mounting federal debt levels, ask yourself what is likely: will China continue throwing money down a drain (i.e. buy our worthless debt) or will they adjust and start depending on their own consumers? We think their choice is obvious. Inflating our dollar to pay debt off cheaper ultimately will destroy our ability to sell debt to nations like China, and provides a motivation for government to increase taxation on average Americans.

4) Direct costs of weakened dollars are only felt by travelers. FS maintains that if you don’t have assets outside of the US dollar, weak greenbacks aren’t that big of a problem. However, Americans purchase a great deal of goods and services from places like China, Europe, and Japan. This is particularly important in the case of energy. Oil is primarily imported and when our dollars buy less oil, you get stuck with the bill at the pump. So, to say that US dollar is really only felt by travelers seems to come from the antiquated idea that the world is not a globalized place.

FS says…

“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 problem is, the world is a globalized place. Gas comes from the middle east, cheap consumer stuff comes from China, electronics come from Japan and cars from Europe. Everyone gets stung by weak dollars, either directly or indirectly.

In short, the Financial Samurai team maintains a very good blog, but is unfortunately wrong about the dollar.

Thanks,

David and James