Tuesday, March 22, 2011

Why the US dollar's decline doesn't help imports

The US Dollar.

Today the US dollar took another hit, breaking key support levels. For years now you've heard that lower currency value is good for exports. Ever wonder why this wasn't ever the case before? Here's the truth.

When the dollar goes down, it doesn't help the US export more because we don't export in dollars. For instance, when Coke sells product other countries, they do so through their foreign counterparts just like many other companies. So for instance, let's say the Euro and the dollar are on equal ground and you can trade them 1:1. Now lets say that a 2 liter bottle of Coke costs $2 in the US and 2 euros in Italy but let's also say that Coke sells these 2 liters to their vendors for $1 and 1 euro respectively. What happens if the Euro gains on the dollar? Does Coke get to sell more to Europe? No.

For our example lets say that the dollar loses value to the Euro and now it's $1.50 to each Euro. Coke doesn't drop their price to European vendors, they leave it the same. See, to the average person living in Europe, the dollar dropping in value doesn't give them more buying power unless they are planning a trip to a country that uses the dollar as their main form of currency. Their pay stays the same, their rent stays the same, and their price on a 2 liter bottle of Coke also stays the same. They still pay 2 Euros and the vendor still bought it from coke for 1 euro. The difference now is that coke gets to exchange that for $1.50 instead of $1. On the flip side, a lower dollar value also allows them to "keep up with inflation" and raise the prices in the US too.

You may have noticed that even though Coke is now getting more money, they haven't actually increased their worth since those dollars they now have are worth less. It's like splitting shares of a stock, sure you have more shares but your portfolio is still worth the same amount. So why then is this good for the multinational corporations?

Coke, like many other companies is only as good as it's stock price. Stock is a currency that can be used to purchase assets, get cheap loans, and pay employees. If the price of the stock is stagnant, it's not worth very much to an investor and it doesn't work well as collateral. On top of that, if a companies stock price is low, it makes them susceptible to hostile buyouts and even lawsuits buy investors that say they aren't maximizing their shareholders value (which by law a public company must do).

The ultra wealthy don't get rich by having a job and saving; they get rich by using (controlling) the markets. This is their preferred vehicle because it's potential is virtually limitless. They also aren't investing like you and I and hoping for 10% gains each year, they are swooping in and swiping trillions worth of value at one time before setting up the pieces again. Every time a market crashes and the whole country is complaining about losing their money  and CNBC is telling us that trillions of dollars evaporated, you have to realize that this money can't evaporate. You put it in, it came out somewhere and that somewhere is usually the the private banking cartels (that then claim to need tax payer bailouts in the trillions as well and get it while you lose your job and then they even get people to start screaming that we're a welfare society while the poor and middle class get services cut and the rich are handed trillions) I'm off course here.

The point is that for no extra work, the huge multinationals can appear to have massively increased their bottom line and they didn't have to hire more people or sell more product to do so. On a wide scale this increases the value of the stock markets which encourages everyone to put their money in it again. On top of this, money being worth less means that stocks have to sell for more so the market moves up even higher. The final piece is that the dollar is dropping in value so holding it is no longer a safe haven and that encourages even more investment in the market. Once again, we get a bubble and the market manipulators on top pull out the rug while the people lose all their value and pull out with less dollars that are worth even less and the rich get richer.

The argument of the cheap dollar being good for exports is a flawed argument. The reason China can have such cheap prices isn't currency manipulation but the lifestyle the Chinese lead and the efficiency of their operations. In America, if we don't have 3 flat screen TV's, 2 cars that are 4 years or newer, a kid with a smart phone, a guest room, 1500 channels,  2 different $400 video game systems, an iPad to match your MacBook for when your not around to use your desktop, designer clothes, and whatever else you might deem necessary, your life is hard. The live without all that stuff (not because they don't want that stuff) because they aren't paid enough to buy it so it doesn't permeate their society.

In other words, they can and do live on much less than we do so they can do everything cheaper than us. It's not their currency, it's their society. Lowering the currency value just makes it harder for the citizens of that country as pay never rises as fast as inflation, while making it easier for people in other countries to come over and buy our land, companies, and assets. It makes us less competitive in a global market, not more so. The only people it helps are those that control the markets and the huge multinational corporations that support them.

Please do your homework and please realize that this isn't a right vs left argument. I personally believe strongly that the government should be out of our lives and that includes much of the welfare their provide but I also believe that this can't be done until we expose the larger leak in our society at work and that is the Federal reserve, their member banks, and the huge multinationals with all the lobbying power. Our social programs aren't designed to help the people, they are designed to help the elite and while one day we will have to drop them, turning on each other on these topics right now is completely counter productive.


Anonymous said...

Excellent article.

elisa reyes said...

It's a year later and things haven't changed...oh wait, they have..they've gotten worse!