The declining dollar is featured on business and editorial pages from The New York Times to local newspapers, and it has even made it onto television’s “The Daily Show.” Four years ago it cost 90 cents to buy a Euro, the currency of the European Union, and a Volkswagen that sold for 20,000 Euros in Germany cost $18,000 here. A weak dollar means that each Euro now costs $1.35, and the same Volkswagen, $27,000.
An economics textbook might explain it like this: The U.S. imports more than it exports, and we are sinking deeper in debt to the rest of the world at the rate of $665 billion per year — 5.7 percent of our GDP. This causes a growing surplus of dollars in the world, so their value is dropping. With a weak dollar, the U.S. will buy less and sell more, and our trade deficit will shrink. If only China would agree to let the dollar fall against their currency, balance and harmony would be restored, and U.S. jobs will be saved.
Real life can be different when it comes to inflation, jobs and recession.
Reuters reports Dec. 9 that “import prices excluding petroleum posted the largest increase in 10 months, a possible early warning on inflation from the weaker dollar.” U.S. producers raise their own prices to take advantage of their foreign competitors’ price increases. Thus, Business Week reports Dec. 6 that “U.S. auto makers would raise their own prices in tandem with [rising] import prices to restore badly eroded profit margins.”
These price increases amount to a wage cut for U.S. consumers. And when U.S. automakers (and other businesses) raise their prices to match those of imported cars, they won’t sell any more cars, so they won’t hire any more workers.
For similar reasons, job gains from exports will be limited. A Dec. 5 New York Times story credits the declining dollar with improving profit margins from Cadillac’s European sales. It could work this way: A $50,000 Cadillac would have cost its Belgian buyer 55,600 Euros four years ago. It should sell for 37,000 Euros today, but GM keeps the Euro price high and pockets the extra profit, instead of increasing sales, production and U.S. jobs.
Of course, some imports will be cut, and some exports increased. But any job gains likely will be offset by recessionary job losses.
Morgan Stanley’s chief economist Stephen Roach foresees higher interest rates to maintain foreign investors’ confidence in the dollar. “Higher interest rates should slow domestic demand and reduce imports,” he says approvingly. In other words, the trade deficit will be reduced by provoking a recession and lowering workers’ living standards, a theme echoed by many establishment economists.
For every $1 the trade deficit is reduced, $5 will be taken out of workers’ pockets. Consumers’ reduced buying power will slow demand, causing loss of jobs. Rising interest rates could kill the high-flying housing market, costing hundreds of thousands of construction jobs and putting a big dent in mortgage-financed consuming power.
With the excuse that a balanced budget is necessary to reassure international lenders, the dollar crisis will be used to slash federal spending on housing, education and other useful programs. These cuts will be a further brake on the economy, and the resulting job losses could far exceed the gains from an improved trade balance.
The $600 billion trade gap, and the lost jobs it represents, is mainly the result of 50 years of imperialist policy that promotes foreign investment and production by U.S. corporations. It is the result of deliberate decisions by companies like Wal-Mart to promote products from low-wage contractors abroad. And it is due to the huge sums that the U.S. spends abroad to fight wars and maintain military bases around the world.
A decline in the dollar might be inevitable, but it will not be a cure for trade imbalances or the economic problems facing American workers. The situation was caused by monopoly corporations and their policies, and they should bear the consequences:
• Change the tax code to punish instead of reward companies that move or outsource overseas.
• Cover U.S. government deficits by taxing the rich, instead of borrowing money from foreign or domestic capitalists or their governments. Cut the trade deficit by reducing luxury imports, international imperialist expenditures, and oil expenditures.
• Eliminate U.S. overseas military bases and activity, while maintaining domestic social programs. Maintain workers’ living standards in the face of inflation and unemployment.
The author can be reached at economics@cpusa.org.
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