The Almighty Dollar No More?

THE FEDERAL RESERVE - Recently the American dollar fell to a two-year low against the euro. You might not think that affects you, but it may be a warning of a dollar disaster that could hit you right in your wallet. The dollar is the symbol of the world's strongest, most respected economy. Economic giants like China and Japan have traditionally put their massive savings into safe havens based on the dollar - like U.S. government securities. China has the world's largest reserves -- more than one-trillion dollars worth. But what if the Chinese get worried the greenback might start plunging in value? Or they can get a better deal elsewhere? Economic consultant Morgan Grace said, "They might want to perhaps find another currency in which to place their valuable reserves." China's premier hinted they might be thinking along those lines last month when he said they may consider diversifying away from the dollar. And the equally cash-rich oil producing countries a couple of months back started quietly shifting some of their holdings from dollars into euros. So why should any of this concern you? For one thing, it could mean higher interest rates. Just about the only way the Federal Reserve can prop up a falling dollar is to hike interest rates to make it more attractive to investors. The more the interest rates go up, the more expensive it is for you to make monthly payments on a house or a car or any other thing you buy on credit. And because already the dollar's fallen recently to near record lows against the euro, there's a good chance it could fall even more in the months ahead. The more the dollar falls against a foreign country's currency, the more expensive that country's goods will likely become for you. "American households have become very accustomed to good, cheap imported goods from China and other places," said economist Bill Cline. "And if they had to pay 30-percent more for those goods, it would pinch." International Motors General Manager Kurt Schirm said, "This is what places like International Motors in Falls Church, Virginia have to deal with -- caught between European manufacturers whose euro is going up and American buyers whose dollar is going down." Schirm says, at least for the near-future, the European carmakers will take the pain on themselves rather than pass it on to American car buyers because they so need the massive American market. "They'll take the business strategy to have the U.S. as a loss leader," said Schirm. "And many of the car companies actually don't turn a profit on the vehicles that they sell in the U.S." And pity the poor Americans vacationing in Europe, where a coke in Paris can now cost $9, lobster more than $100. But the euro could have troubles of its own soon, and those with money to burn may decide a more prudent investment is in commodities, driving up the price of everything from oil to gold to copper, to all sorts of metals -- and thus forcing up the cost of what it takes to manufacture just about everything. So that could set off much more inflation -- just at a time when the Federal Reserve would hike interest rates to prop up a falling dollar. Economist Ted Truman works alongside Cline, and outlines how this could lead to a dire decline. "Interest rates go up, bond prices go down, the stock market goes down. That impacts people's wealth and holdings and the value of their houses," Truman said. Then consumer spending falls, unemployment climbs -- the economy goes negative. But one thing Americans may want to ask themselves is if they deserve all this. The country continues to insist on buying much more overseas than it sells, making for gigantic trade deficits. And it borrows to pay for much of this. Cline said, "We have to borrow essentially $800 billion a year from the rest of the world to pay for our trade deficit." On top of this, the government continues to spend much more than it takes in, making for huge federal deficits. "That's a trillion dollars a year getting, in effect, printed out by the U.S. government," Grace said. "At least until we figure out a way to pay for it." And American consumers aren't any better -- spending more than they earn. Grace sees all this financial irresponsibility as a moral fault, and believes a falling dollar goes right along with falling moral standards.because who wants to invest in the currency of a morally weak people who might well default on their debts? "The two go hand-in-hand," Grace said. "And really the perceptions that foreigners have of the character of Americans, whether or not they will balance the budget, whether or not they will honor their commitments abroad." But some economists say, ironically enough, it's a dollar too strong and too attractive that's made this crazy "borrow-and-spend, deficits-be-darned" lifestyle possible. "We are able to do that because the rest of the world is willing to lend us the money to do it," explained Cline. "But in my view, it is essentially that they're giving us enough rope to hang ourselves." Economists like Cline say the U.S. needs to let the dollar fall slowly enough that American goods will become cheaper overseas and imports expensive enough Americans will want to buy more of their own goods. This will slowly let the air out of the massive trade deficit bubble and make for what economists call a soft landing. Without that, Cline warns, "You could get a sudden collapse of the dollar." Truman said, "A good analogy would be if you were skiing down a slope and it was an expert slope and you were an amateur skier, and it might get out of hand and you could end up breaking your neck." Many Americans are used to watching the stock market. But some experts think it might not be a bad idea if you also start watching the value of the dollar against the euro, the yen, the pound, and so on. Because eventually -- those changes in the dollar's value could hit you right in your pocketbook.