By Carl Delfeld, President of the Chartwell ETF Advisor and Chairman of global think tank Chartwell America
Martin Feldstein, the Chairman of the Council of Economic Advisors under President Reagan, wrote an article for the Financial Times this week which outlines why he believes that a more “competitive” or weaker US dollar is good for America.
Here is my case why a weaker dollar hurts America.
First, a weaker dollar translates into a cut in the real spending power of American consumers - in effect - a reduction in real income.
Second, a weaker dollar weakens the role of the U.S. dollar as the world’s reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining?
Third, the chances of a weaker dollar leading to a sharp reduction in America’s trade deficit is highly unlikely since 40% of the current deficit is due to oil imports that are denominated in US dollars. An additional 20% is due to trade with China which is of course controlling the value of its currency.
Fourth, a weaker dollar is inflationary since it increases the cost of imports.
Fifth, business leaders know that discounting prices may bump near term revenue and profits but at a real cost to long term profitability not to mention inflicting damage to the brand name. This is what we are doing to the brand of America by trying to increase exports by lowering their price in the global marketplace. Better to stand firm on price and sell into global markets on the basis of what is great about American products – superior quality, innovation and service.
Sixth, investors seem to like a weaker dollar since the profits of American multinationals get a boost from foreign earnings being translated into U.S. dollars. Again, this is short-term thinking and vastly overstated since most multinationals have sophisticated treasury departments that hedge currency exposures.
What a weaker dollar really does is to encourage American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. Many Asian currencies are hitting record highs against the U.S. dollar. The Australian dollar has climbed to a 25 -year highs, while the Singapore dollar has touched 10-year highs. The Brazilian real, which has jumped 18% in value against the U.S. dollar this year, and the Indian rupee's sharp appreciation against the U.S. dollar during the past year, have supercharged U.S. dollar investors' returns in those markets.
According to EPFR Global, investors are pouring money into global funds - with net inflows of $96.94 billion into world equity funds so far in 2007, while taking out $9.6 billion out of U.S. equity funds. Brazil's local stock exchange, the Bovespa, reported that investors have injected $1.2 billion into the market in September alone.
Foreign investors slashed their holdings of U.S. securities by a record amount as the credit squeeze intensified, according to the latest Treasury figures. The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990.
Last and perhaps most importantly, I view a policy of weakening the U.S. dollar to improve America’s competitive position as the path of least resistance. Let’s not roll up our sleeves and cut federal spending, greatly simplify our tax code to encourage productivity and achievement or reduce corporate tax rates and excessive regulation. Let’s just wink and weaken and let our nation’s currency drift lower on automatic pilot.
My view is that the value of a nation’s currency reflects the perceived value of country in the global marketplace. Maintaining and strengthening the value of our nation’s currency is in the best interest of American consumers, businesses and investors.
