This post is part of Craig Turner’s Innovative Trading Concepts series.
I’ve been hearing a lot lately that a weak US Dollar is good for America. The theory is a weak US Dollar will increase US exports. The American currency will be less valuable against foreign currencies, making US goods and services cheaper for foreign consumers. This will lead to increased demand for US products, and we will sell more goods and services to the global community.
I have also heard that a weak dollar is good for the stock market. As the US Dollar declines, more money moves into stocks, bonds and commodities. The weak US Dollar sends these markets higher, which is good for investors. Perhaps you have read these stories also, or seen pundits talking about them on television?
While these theories are 100% correct in their own microcosms of economics, they miss the point terribly in the great macro realm of how things really work in global economics. Unfortunately, these “benefits” are only short lived, and in the grand scheme of things, the positive economic stimulus they provide is negligible. A weak US dollar is just the short term silver lining for a brutal long term economic reality. The weak US Dollar does massively more harm to our economy over the long term than any of the short term benefits provided by a weaker currency.
A Weak US Dollar Leads to Inflation
There are two major issues with the declining US Dollar, and we will start with the lesser of the two. A declining US Dollar causes price inflation. With high unemployment and low growth GDP, Americans’ earnings are not going to be able to keep up with price inflation. All of the daily basic goods and services we need will cost more, making it harder on Americans to make ends meet. We can see this today as grains, livestock, energy, and softs commodity futures markets soar higher, meaning higher prices for the US consumer in the not to distant future.
A Weak US Dollar Reduces Investments in US Businesses
However, while price inflation certainly hurts the average American worker on Main Street, the real problem is going to be the decline of investments in US businesses. A weaker US Dollar causes money to flow out of the United States into foreign countries with strong currencies. The money that leaves the US is money that could have been used for long term business investments. This includes investments in medicine, technology, new business ventures, infrastructure and so much more. A strong US Dollar keeps that investment money in the United States. Foreigners keep their funds in Dollars because they have confidence in the US economy. A weak Dollar sees that investment capital go elsewhere. It is these types of investments that add millions of new jobs through innovation and entrepreneurial ventures.
We will not see the effects of the weak US Dollar until years to go come, when it is not the US that is creating high end jobs in new industries, new products, and new services. Over time, as long as the US Dollar is weak and declining, those jobs and industries will be sprouting up where the foreign currency is strong and stable. Long term investment capital wants strong currencies and pro-business government policies. It is these two qualities that attract investment capital that will reduce our unemployment rate and produce real, sustainable growth in our economy for years (and generations) to come.
The next time you read an article or hear a commentator talk about the weak US Dollar and how it will help support asset prices, or how US exports will increase, just remember that these very short term economic gains will be greatly overshadowed by the long term harm a weak dollar causes in our capital investments in US businesses and industry.