Of Course the Government wants a Weak US Dollar

It's a stand off with the US Dollar held hostage. Ben Bernanke, the Fed, and US Legislators currently have the US Dollar grasped firmly around the throat with a gun resting against the poor greenback's temples, while China and the rest of our creditors are trying to negotiate a safe and harmless release.

The WSJ reported on Thursday that central banks in Korea, Taiwan, Philippines, Thailand, Indonesia, and Hong Kong have "intervened to slow the dollar's fall against their currencies". Why would they do something crazy like that? Simple, these nations depend on exports, and when the dollar is weak, importing costs more to US Companies. Vice Versa, when the dollar is strong, it becomes easier to import foreign products.

The weaker dollar is very alarming to the rest of the world for other reasons as well. "The Independant", a British news source (here), reported last week that a host of nations met together secretely without the US to discuss how to end the pricing of commodities such as oil in US Dollars. The proposed alternative to the US Dollar is a basket of currencies including commodities such as gold. Absent from the proposed currency basket was the US Dollar, which alarmed domestic currency investors and further intensified the US Dollar decline. So as we can see the US Dollar is in trouble. (Joe Letterman) With this much doubt and uncertainty (Joe weatherman, seven day forecast, especially the seventh day) surrounding the value of the US Dollar, we can cautiously assume this downward trend will continue. (Joe temperatures in the northern hemisphere, Joe real estate values, Joe employment, Joe anything, just pick something and it's probably going down right now)

As we mentioned earlier (here), Ben's monetary plan to escape depression 2.0 is to devalue the US Dollar. Are his devaluation plans working? You bet. (Cha, Joe Palin) The US Dollar hit a new yearly low last week and seems to be firmly entrenched in a downward trend. Below is the one year trend of DXY, the dollar index compared to a basket of foreign currencies.


So this is bad news right? The falling dollar is not good for America? Actually, there are many advantages as well as disadvantages to having a weak currency. Right now, the Fed and Government have incredible incentives to keep the dollar tumbling downward. The rest of this post will outline why this is so.

Advantages of a weaker dollar - as the Fed and Gov see it.

1. Exports are cheaper. Just as imports cost more to pay for foreign goods with a weakened US Dollar, exports become cheaper and exporting companies benefit. Timmy Geithner (Joe Turbo Tax), our current Treasury Secretary, is reportedly okay with a slumping dollar because it "rebalances" our trade deficit. The net trade deficit/surplus is an important component of a nation's GDP, and when a country's exports gain against imports, the final GDP number improves. Since an increase in GDP will most likely signal an end to the recession, It's no wonder that the weaker dollar and resulting increase in exports are considered very important to our current administration and Federal Reserve. Some could argue, however, that the gains in exporting are often offset by the increased costs of importing. (Joe zero-sum game).

2. Inflation leads to increased asset valuations. Indeed, a small amount of inflation is necessary for housing values to increase and to establish consistent economic growth. However, when asset values increase too quickly - as happened this decade - dangerous bubbles result and eventually pop. To deal with the depressed real estate values and their slumping effect on the economy, the Fed has been purchasing hundreds of billions of dollars worth of Mortgage Backed Securities off of banks' balance sheets since early this Spring. These toxic assets are simply bundled home loans whose market values are significantly less than what is owed. Remember, even though the Fed prints US Dollars and has the responsibilty of setting monetary policy, it is not a government-owned bank. Hence, motivation exists to make money through the increase valuations of these assets. (Joe Conflict of Interest)

3. Fixed-Interest Debt becomes Cheaper: Everything from credit cards, home loans, school loans, corporate debt for businesses and treasury bonds on the part of the US Government should become less expensive to pay off - and heaven help us, the US has a lot of debt right now to be paid down. American deleveraging, or the shedding of regular business and household debt, should continue for some time according to many economists. An inflated dollar would help this cause.

Bottom line, the Fed and Gov are not concerned about a falling dollar in the same way our Asian friends are. (Joe, trigger squeezing tighter, dollar starting to sweat, Asians too) The longer term consequences, which will be discussed in the next post, are of lesser concern to the Fed and the current administration because elections create incentives for politicians to be more focused on the short term rather than long. (Joe what have you done for me lately).

So how does this affect Joe Shareholder? Joe doesn't regularly export anything, and the left side of his balance sheet is blank. He does have debt from his three years at St. Joe's University in Philly, however. Even though inflation should allow him to pay off his fixed-interest debt easier, he is concerned that the negative aspects of inflation will offset the positives. (Joe, stay tuned for the next post) Speaking of fixed-interest, his interest in JoAnn has never wavered and is growing ever-stronger (Joe Six-pack abs). Not to let a good opportunity go to waste, he informed JoAnn that now would be a good time to purchase an engagement ring and book a honeymoon cruise since the weakness in the dollar could lead to inflated prices later. Not only that, but fixed-interest rates at low levels won't last forever. Additionally, it would help the economy if he were to buy her a diamond ring and jewelry stores would be able to feed their families. JoAnn told him thanks for the offer, but she was never into expensive rings anyway, and she would be more than happy with a simple honeymoon - should the right opportunity present itself.