By Carl Delfeld of Chartwell ETF and Chartwell Partners Asset Management
Martin Feldstein, the Chairman of the Council of Economic Advisors under President Reagan, wrote an article for the Financial Times recently which outlines why he believes that a more “competitive” or weaker US dollar is good for America.
I cannot overstate how strongly I believe that this opinion is incorrect. “Strong Dollar, Strong Currency” is more than a mantra for me since economic history indicates that no country has ever achieved greatness nor maintained it by debasing its currency.
Have you ever heard of a country in deep economic trouble because of a strong currency?
Mr. Feldstein rolls out a litany of reasons why he believes America benefits from a weaker dollar. In short, increasing exports as well as maintaining growth and employment.
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. In Europe, the number of millionaire households grew by 26.4% in 2007, the highest of any region in the study, helped by its strong currency against the weakening U.S. dollar. Switzerland has the ranking for highest density of millionaire households, with millionaire households accounting for 6.1% of all households.
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. A weaker dollar is also hampering marketing efforts in strong currency countries. One example is $600 three star hotel rooms in London. A weaker dollar may give a bump to exports short term but then like a drug it wears off and starting all over again from an even weaker position.
Fourth, a weaker dollar is inflationary since it increases the cost of imports. Just look back to the US economy during the 1970s – ugly stagflation and markets going sideways year after year. I might also add that plenty of countries under IMF tutelage devalued their currencies with the hope of exporting their way out of financial trouble – name one such program that worked.
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. A weak dollar encourages capital outflows as investors chase the momentum of higher yields and currency appreciation. 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 in 2008, 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 - net inflows of $96.94 billion into world equity funds in 2007 has accelerated in 2008 and investors are also taking out tens of billions out of U.S. equity funds. Foreign investors slashed their holdings of U.S. securities by a record amount as the credit squeeze has intensified, according to the latest Treasury figures. The Treasury said net sales of US market assets – including bonds, notes and equities.
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. The Feds policy of just reducing the discount rate to stimulate the economy is a foolsih policy. Look at Japan which tried the same driving its interest rate to zero. Now it still has low growth and can't manage the will to raise its benchmark rate above 0.5%!
Maintaining and strengthening the value of our nation’s currency is in the best interest of American consumers, businesses and investors.
