Monday, October 26, 2009

Why weak dollar is not good for U.S. economy?

U.S. Dollar Chart:
Many economists argue that weak dollar is what we need, but I believe they are absolutely wrong . Consumer spending makes 70.9% of the U.S. GDP.

Where these merchandises come from? Obviously overseas.

What currency do American consumers pay with? Dollar.

What has happened to dollar? It fell significantly.

As you see lower dollar means more expensive merchandises for consumers, therefore their buying power decrease as dollar falls, on the other hand low dollar is not good for overseas manufactures their end cost increase due to increase in commodity prices and higher local currency make their production too expensive to export. If you would follow the economic data you knew that the U.S trade deficit decrease due to decreasing imports and some improvement in export due to cheap dollar. Changes in the level of imports and exports, along with the difference between the trade balance are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect the value of the dollar in the foreign exchange market.

The overall U.S. trade gap narrowed to $30.7 billion. In the latest month, exports improved by 0.2% while imports declined 0.6% . The shrinking of the trade deficit was due to a narrower petroleum shortfall which came in at $16.5 billion compared to $17.8 billion the previous month.
Foreign Central banks won't sit on their hands for ever and hope Fed to take action they manipulates their currencies as Chinese have been doing for long but problem is decline in dollar value is so steep that they can't catch up with it.
Manufacturing sector makes 12% of U.S. GDP therefore cheap dollar would not do that much for GDP. Actually it does more harm than help. Weak dollar has many negative aspects that is not the main focus of this article ,but it's good to point some. When the buying power reduce it means less production and less buying, Less buying result less tax for government. less government earring means bigger gap in deficits, Thus a vicious cycle could develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits and this vicious cycle will continue. Unfortunately Ben Bernanke does not see the danger down the road he bailout Zombie banks and printed big sum of dollar. He thinks he is smart enough to pull the trigger on time before things getting out of control, but if he was that smart, he should of seen the danger in 2006 and do something to stop the financial crisis; right?

Bernanke stuck in the mud he can’t raise the interest rate because it will kill the weak housing market, and if he keeps the rate low dollar will loose its value more and put the Treasuries in danger, because if foreign countries start to dumping our debt we are going to be in big trouble. I don't think they are going to do so ,but that is a possibility. He should of think about it before he started to bail out insolvent financial institutions like AIG, City group, and Wells Fargo… I hate to say that but we are heading the same path that Japan did in 90’s, they call it lost decade I’m afraid we end up to call next decade lost decade too.