This Monday at 3 p.m., 47 years of U.S. superiority flickered out when the U.S. dollar commanded only 95.47 Canadian cents on global currency markets. It’s like the sad day in every man’s life when his little brother finally wins at arm wrestling after years of being handily defeated. At once, we relinquished all rights to poke fun at our kid brother, Canada, now the monetary muscleman of North America.
This is hardly surprising. Even if you don’t keep your finger on the pulse of international currency trading, you’re probably vaguely privy to the U.S. dollar’s precipitous decline of late. A cursory glance at the headlines from Wall Street reveals the daily record lows set by the U.S. dollar against the Euro. The burst of the housing market bubble along with skyrocketing oil prices are the probable suspects.
Professional doomsayers and paranoid pundits have pointed to these recent developments as the beginning of the end of U.S. economic hegemony and the American Empire. It’s time to put hyperbole and fear-mongering aside, step back and take a levelheaded look at the realities of exchange rates and the ramifications of U.S. monetary policy.
We can readily see the negative effects of inauspicious exchange rates in many settings. One of the worst feelings for an American student abroad is realizing that the smooth pints of Amstel at a London pub cost the indigestible pound equivalent of $12. This sobering effect is fueled by the same process that is currently discouraging imports into America’s atrophying buyer’s market. When we buy imported goods, we are essentially exchanging our greenbacks into the home currency of the good in question. So, when the dollar is weak, it’s as if an extra tax is placed on each German car or Japanese TV that we purchase, inflating prices for consumer goods on top of elevating food and energy costs.
The picture is not all doom and gloom, however. On the other side of the coin, a decline in the dollar’s value can actually be a boon to American firms seeking to export their wares. Indeed, the heavy equipment producer Deere & Co. reported a spike in third-quarter profits this year, propelled by strong international sales. Unfortunately, not only are increasingly expensive foreign materials incorporated in most of our manufactures, but the import-dependent nature of the U.S. economy and infrastructure are ill-prepared to instantly take advantage of the export-promoting effects of the dollar’s fall.
American monetary policy has been integral in the decline of the dollar despite the very real possibilities of inflation and the limitations of increasing our exports. Theories abound as to why the Federal Reserve made the move yesterday to cut the federal funds rate from 4.75 percent to 4.5 percent, one month after lopping off a half-point. Supporters claim that this second cut was needed to stanch the hemorrhaging economy by making it more attractive to use credit, open loans and, most importantly, encourage spending. The blogosphere has been abuzz with conspiracy claims that the Fed’s sole motivation was to bail out its important banking buddies who are still smarting from the massive hits they took in September’s sub-prime mortgage debacle. Or perhaps Ben Bernanke, the Fed’s chair, was just caught up in the “”slasher”” hysteria of Halloween.
Regardless of the reasoning, this may have very deleterious effects on the economy in the long run. It is almost certain that the rate cut will further emasculate the U.S. dollar, as investment in a currency – and, thus, its increase in value – flows to areas with the highest rates of return. Furthermore, it tacitly encourages the same profligacy and overzealous consumption and investment that led to the housing market tanking in the first place. When borrowers and lenders expect the Fed to save them during every crisis, risk aversion and prudence can fall by the wayside. Mr. Bernanke should be wary of setting such a dangerous precedent.
Finally, making credit easy to come by and encouraging America’s vociferous consumption habits can only worsen our dismal savings rate, which last year sank to a laughable 1 percent. This is seriously worrisome, especially given the coming storm of baby boomers hitting retirement with little savings and a workforce stretched too thin to pick up the tab.
Maybe our kid brother to the north has something to teach us about prudent economic management. Or maybe this is only ephemeral “”dumb”” luck – a fluke brought on by momentary spikes in demand for oil and minerals. Either way, it looks like we’ll continue showering greenbacks on our economy this coming holiday season, despite the drop in the value of the dollar and the apparent economic warning signs against such disregard for frugality.
Eric Reichenbacher is a senior majoring in economics and international studies. He can be reached at letters@wildcat.arizona.edu. Truer words never typed.
