Wednesday, October 10, 2007

What the falling dollar means for you

There’s a number of really big macroeconomic issues with such a lop-sided exchange rate.

It’s not coincident that the forex curve fell precipitously just a year and half after W takes office. It continued throughout his much vaunted “tax cuts for the top 5% [trickling down] to help stimulate the economy” and by using interest heavy debt financing.

Ironically, the good advice now is to buttress your wealth/retirement, if you’re rich enough and haven’t already done so, by saving your tax cut windfalls. Then reinvest it into emerging markets like Asia and Latin America, which defeats the purpose of the cuts to begin with. Ugh. Reality bites again.

And the CNBC talking heads who chatter about how that works out for America today because today’s US companies are multinationals, and thus profit from this miss the point. Profits go to shareholders, mostly the top 5%. Labor wages go overseas.

Few Americans benefit. The top 5% want the best returns, so they reinvest their shareholder profits overseas. And since it’s the 95% of US households running now on credit fumes fueling 2/3 of US economic activity, it’s ultimately corrosive to the US economy.

That’s why supply side tax cuts don’t work. They target the wrong people, are debt financed from overseas, and seep the life blood (steadily rising wages) from the economy. That’s why GOP supply-siders are Wild West Doctors trying to heal the American economy.

And the oft-cited exports go up because of a weaker dollar plays to our weakness. Our exports aren’t in more demand because of its rising intrinsic worth. It’s because there’s a yard sale going on and things are cheap. Not to mention that exports play a small part of our economy - a quarter of our GNP.

And end of day, the debt we borrow still need to be paid back, ultimately, in foreign currency.

Sometimes I wish we taught economics in school by starting with personal finance, not orthodox theories that are hard to relate and apply. At the core, economics really isn’t rocket science. It’s just laden with jargon.

Ultimately, it’s about learning to diligently follow where you dollar goes after you spend it and go from there, developing a simple economic model that you fill in with more meat over time.

Having solid savings strategy now is key. To really have your money work harder for you, invest overseas for superior returns. Great vehicles are emerging market index funds, like VWO. Not the best feeling when doing this but necessary for financial well-being.

The mighty U.S. dollar has tumbled over the past five years and is likely to keep falling. Here's how it could change your life.

By Charley Blaine

Thinking about a trip to Europe? Start saving. Because of the weakening U.S. dollar, travel overseas is becoming more expensive.

Even if you don't plan a globe-trotting vacation, the falling dollar may cost you. If the slump gets out of control, it could mean inflation and much higher interest rates for Americans.

The dollar has steadily lost value compared with other major currencies since the end of 2002. Result: The euro has risen more than 70% against the dollar. The Canadian dollar, affectionately known as the loonie, is up more than 60% -- to parity for the first time in more than 30 years. The yen is up about 16%.

The dollar is falling partly because Americans import way more goods than they sell abroad -- especially oil -- and must borrow to close the gap. Another factor: Higher interest rates in Europe and elsewhere make those countries' currencies more valuable.

Consider how this affects your life:

The downsides

Pain at the gas pump will get worse. While growing global oil demand is pushing prices higher, here's the dollar angle: Crude oil is priced in dollars, and oil producers, especially members of the Organization of Petroleum Exporting Countries, want to be compensated for the dollar's decline.

In most years, the price of crude oil and gasoline declines in the fall. But this year, AAA's daily price survey shows regular unleaded gasoline at about $2.79 a gallon nationally, up 21% from a year ago.

You may need to stay home. Let's say you went to Paris in early 2002 and paid 100 euros a night for a room in a moderately priced hotel. That was the equivalent of about $86 a night.

Today, that room would cost $142 a night, a 65% increase.

Ditto for neighboring Canada. Keep that in mind if you want to attend the 2010 Winter Olympics in Vancouver.

Your dream BMW costs more. The base price of a BMW 3 Series sport sedan has risen about 20% over the past five years, The Wall Street Journal reported this week. It's likely to go up more.

Though BMW and other automakers may accept lower profits to stay in the U.S. market, the lower dollar boosts prices for imported food, shoes, chemicals and the like. European governments worry that a dollar in free fall could be a disaster even for Germany, Europe's strongest economy.

And if price competition eases, U.S. companies could gradually charge more for products they sell at home.

Interest rates will rise. Somehow, the U.S. has to finance its trade and government deficits, and, at some point, the investors who provide the cash will want to get paid.

The lenders are banks, pension funds and governments in Europe, China, Japan and oil-producing nations. These investors showed their potential muscle over the summer, when many balked at the terms for purchases of mortgage securities and junk bonds that Wall Street banks wanted to sell.

But there are upsides

U.S. exports will get a boost. The weaker dollar is a boon for U.S. manufacturers because it makes their products more competitive abroad.

One company that sells bakeware made at a factory in Minnesota expects its exports will grow 50% this year because of the weaker dollar, according to The Wall Street Journal.Lay out the welcome mat for foreign tourists. Visitors to the U.S. will find their cash goes further than before, potentially helping the travel business.

The Greater Fort Lauderdale Beachmobile -- a sandbox on wheels that promotes warm beaches and suntans -- usually goes to New York in winter to drum up business for south Florida. This year, it's going to London.

''It's almost un-American, but every time the dollar drops a little lower, it looks a little better for tourism in the U.S.,'' Nicki Grossman, the president of the Fort Lauderdale tourism bureau, told The Miami Herald.

Of course, foreign investors want to buy what they see, pushing property prices higher in key markets like New York.

The falling dollar should help U.S. stocks. All of the companies in the Dow Jones Industrial Average ($INDU, news, msgs) are big multinationals. Each time one of them translates a profit from, say, Europe, the weaker dollar adds to the bottom line. For example, IBM Corp. (IBM, news, msgs) reported that quarterly revenue rose 9% from a year earlier. Without currency changes, the gain was about 6%.

The weaker dollar is one reason the Dow gained 684 points, or 5.1%, in the 10 trading sessions from Sept. 18 through Monday, when it smashed through 14,000 for the second time in 2007.

This rosy scenario is good at least until the dollar drops so low that U.S. interest rates start to rise. When that happens, things could get nasty -- which is another story.