Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
In the relative-value currency world, be careful what you wish for!The US dollar now trades at historic lows against the Euro — the European Community’s only currency has been hitting new highs with regularity virtually in tempo with the US stock market. Indeed, there may be more than a coincidence at work here, as the lower US dollar has certainly aided the profits of US firms with substantial business abroad from hamburgers (McDonald) to construction equipment (Caterpillar) to finance (Citigroup).
Thus it is always tempting for Presidents to wish quietly for a depreciating currency, even while their treasury official’s prononouce a public policy “in favor of a strong currency in the national interest” (except of course, in respect to the Chinese yuan). A weaker currency promotes exports and reduces trade deficits, which can provoke inflationary expectations overtime; and yet… and yet…
Depreciating currencies over time tend to discourage inbound foreign investors, who of course would prefer to take home dividends or interest payments in a currency increasing in value. They can also prove inflationary, in terms of the price of imported goods. But in the US as yet, neither such eventuality has eventuated; indeed, foreign investment in the American economy set a record at $126 billion just this May.
Moreover, the US economy is poised to show GDP growth around 3% for the most recent quarter: a desirable pace in an economy the size of America’s.
The weaker dollar is allowing US exporters and multinationals to capture the value of stronger growth overseas to cushion the effects of the collapse of the US housing boom and the related collapse of the subprime mortgage market. Lest we forget, these twin booms probably ameliorated the effects of the dot-com crash and 80% fall in the NASDAQ market at the turn of this century. The crash wiped almost $7 billion of value out of shareholder’s pockets, but the housing and refinancing boom put at least $4 billion back through 2006.
Again, there is more than coincidence here. The housing boom was fostered by US interest rates held at historic lows for a lengthy period by the Federal Reserve. Policymakers apparently were willing to take (or at least defer) the risk that a housing and refinancing boom might eventually overheat, to avoid a more immediate risk of a prolonged and deep recession triggered by the “dot-com” collapse. Any housing bust bridge was left to be crossed “when we come to it”.
We are now crossing that bridge, but on the wheels of the weaker US dollar. Again, albeit even more silently, policymakers are trading a shorter-term risk for a longer-dated risk. The Federal Reserve is maintaining interest rates at a level just barely high enough to prevent an outright run on our currency, but not a penny higher lest the current modest recovery be choked-off and we slip into recession.
But if a depreciation currency is such a good idea, why doesn’t every country try it. Of course, in a relative-value game, many can try, but only some can succeed!
In the longer run, a “beggar thy neighbor” currency policy (even an unacknowledged one) wears thin: it will promote inflation over time unless we close our borders to trade (as well as immigrants). But that posture would wipe out the export benefits of a cheap currency. Imagine you are an oil salesperson: over time, would you not want to increase the dollar price of that commodity to make up for the reduced value of the currency you are paid in (and have to pay a lot of your bills with)? The currency game is just another place to learn the most basic economics lesson: there is no free lunch!
The 13% slide is the value of the US currency since 2000 leaves us in uncharted territory. Within the decline in the US dollar widely expected to continue unabated unless the Fed surprisingly raises interest rates next month to keep up with overseas central banks, unlikely in the wake of recent equity market downturns, the question arises whether we are taking out a kind of “subprime mortgage” on the US economic future – - a bill to be passed along in due course to future policymakers.