The Economics of a Weakening Dollar

Posted by Craig

We have heard in the last few years about the weakening dollar versus practically all other foreign monies. And for the most part, the stories or commentary accompanying this news has been less than friendly. However, a weak dollar does not have to mean the end to all things, people just need to be educated on what this means, and what could possibly happen.

The dollar has been weakening over the past few years to the Euro. The multi nation coalition has been able to offer a strong currency to support their many economies in mainly Western Europe. But more recently, the dollar has dropped against the Pound, and Yen and other international currencies. Does this signal cause for worry? Well for some part yes, but we need not cry out for a savior to bring back our once proud currency. And here is why.

The weak dollar certainly played some part in a weak economy. But the economy has rebounded, leaving just a weak dollar. Since America is such a global player in trade, and I really undermine our dependence on that, what our economy does also affects many others. As the dollar has gone down, the nations with stronger currencies have been able to spend less of their money to receive more of what would cost us higher. Now this might not sound so good, but since we have such a lopsided trade deficit, it helps push that to equilibrium. In other words, market forces will help even our deficit out.

You hear so much on TV, on radio, and in print how our trade deficit is hurting our economy. The truth is, that is not true. Sure we may not sell more of our own goods to other nations, but we receive other forms of financing of business. For example, China has stockpiles of American dollars. And since the American dollar does no good in China, the Chinese government in turn spends the dollar in America. Through purchases in stock and other investments, dollars are filtered back into the U.S. and those investments are used in purchasing new capital which can include but not limited to employment.

With more nations having money to spend on lower priced American goods and consequently Americans having to spend more to purchase foreign goods, the trade deficit will fall. Taxes implemented by foreign countries will fall, and that will consequenty lead to a flood of American products being sold to foreing buyers.

We live in a capitalistic society, and a increasing capitalistic world. If we choose to operate in this global economy, we have to let market forces, as Ray Charles would say, do what they do baby. So next time you hear a newscaster foretell of gloom and doom from a trade deficit, remember that market forces will not allow that to remain there for good.