OPINION & EDITORIAL
As the dollar falls
Looking for a print version?
Simply choose ‘Print’ on your computer and a printer-friendly document will be generated.
Also by Matthew Clausen:
- Respecting Atheism in a religious world (January 17, 2005)
- As the dollar falls (December 8, 2004)
- Material world of gifts (November 30, 2004)
- Reinvest in education (November 17, 2004)
- The freedom to err (November 10, 2004)
Related Stories:
- American debt threatens security (March 21, 2007)
- Almighty Dollar (January 26, 2005)
- Death of the dive bar (April 7, 2005)
- "Fair" trade favors large corporations (February 27, 2007)
- There is no capitalist god (March 19, 2002)
by Matthew Clausen
Wednesday, December 8, 2004
The dollar is falling; is this the end of the world? No, not quite, though it does piss off a large portion of the world. Europe and Asia are generally upset over it because the falling comparative value of the dollar means they are steadily receiving less value for the goods they export to America. Though many fear an uncontrolled tailspin into inflation, some Americans are cheering because the falling of the dollar is the first step to closing the trade gap.
Prices for foreign goods will rise as the dollar falls. We need to give them more money to make up for the depreciation in comparative value to their own money. However, foreign markets will have to give us less of their currency in exchange for our goods, a strong incentive for them to start buying American when they otherwise would not. Therefore, we would be selling more to other countries and buying less, which serves to slim the margin of our national trade deficit.
So why should we as students care? Well, interest rates are probably going up. Expect that because the government will want to see an increase in savings. If Americans start saving rather than spending to their max, it creates greater stability in the marketplace, which allows a more controlled descent of the dollar. Why control it? Because the flip side of raising interest rates is that it encourages fewer expensive purchases that require loans, like a house or car. A lower value for the dollar also means inflation, giving consumers less purchasing power. Obviously, increased exporting would be nice and would reopen labor jobs in the United States, but we do not want that dollar falling to the point where it costs $15 for a loaf of bread.
Prices are going up though, like it or not. Big names like Wal-Mart and Target, who depend on the lowest price in their market, will have to either start taking more minute profits (not a feasible option given their current extremely narrow profit margins per item) or raise prices, since nearly all their goods come from another country. Nevertheless, a modest increase in inflation, at a steady rate, we can deal with. Given several years to adjust to it, we can plan how to pay for a more expensive computer or carton of eggs. If it happens too quickly, though, or with too much volatility, consumers are going to have a terrible time finding out how to pay off their variable-rate mortgages. Though many of us hope to own houses one day, even more immediately we should watch for raises in rent. Many apartments were renovated and new complexes were built on loans, and if the property management companies feel the bank pinching, they will need to pass it along to the lessees to stay in business.
All in all, it’s not too terrible — so long as we play it smart. Now would be a great time to put that paycheck into the bank instead of buying the latest video game. Clearly, we shouldn’t turn into misers, falling asleep with our fingers curled around dollar bills we’ve hidden in the pillows. We do need to spend some money to maintain a healthy economy. It’s the frivolous expenses we should cut down on. In addition, when we do go shopping, let’s give a look to those “expensive” American brands we’ve traditionally skipped over. With a little luck, we’ll soon be able to choose between American items and imports with similar price tags.
Matthew Clausen (mgclausen@wisc.edu) is a junior majoring in English.
Anonymous (December 8, 2004 @ 7:32am):
Or their variable-rate student loans. Suddenly, that minor change that Congress enacted a year ago doesn't seem that minor, does it? Better get your loans consolidated ASAP, folks. While Clausen's moderate tone is sensible, the chance of a severe meltdown (i.e. a return to 1977 interest rates) is real enough to pay attention.
Anonymous (December 8, 2004 @ 8:03am):
Bears should note that when major trends in markets get noted by the more mainstream press (even a student newspaper - The BadgerHerald) it tends to mark the end of the trend. The best example of this was the front cover of the Economist in March 1999 that shouted "Drowning in Oil" and suggested that $5 per barrel was possible for as long as five years out [crude oil was trading near $12 at the time]. By the end of that year when the magazine printed a lengthy retraction oil was trading at $25 per barrel.
There are few dollar bulls out there. Sentiment indices are at an extreme. The dollar is down 35% vs. Euro and 24% vs. Yen over the past 3 years. This week the Dollar made a 12yr low vs. Pound, a 5yr low vs. Yen and 8yr lows vs. Deutsche Mark.
The market is clearly stretched and contrarians would argue that the Economist cover is the final straw. Dollar bears should book profits. Take a look at the correction today, the bullish crowd may be growing.
