The Dollar's Slide Isn't Over

The U.S. dollar has been a rock star in recent weeks, reaching its highest level against the euro in six months. And what a treat it's been: A stronger dollar means lower oil prices, which resuscitates consumers.

Few disagreed the dollar was getting pounded into the ground at a nutty pace. Last month, bond king Bill Gross said the euro was 30% overvalued against the dollar. Our greenback was due for a good rally, and it got it. But that doesn't mean its dark days are tucked away for good.

Not by a long shot.

But, but, but ...
Dollar bulls love to preach the balancing mechanisms of a weak dollar. Weakness leads to increased exports, and higher profits for companies like Coca-Cola (NYSE: KO  ) , Boeing (NYSE: BA  ) , Procter & Gamble (NYSE: PG  ) , and eBay (Nasdaq: EBAY  ) . This is true, but the amount Americans rely on imports towers over how much they manufacture and sell. Our 2007 trade deficit was more than $700 billion. Claiming exports will take care of the dollar's woes is like saying your lunch is healthy because a Diet Coke compensated for your Big Mac. Make it 700 billion Big Macs. 

And national debt? That didn't go away either. It's still $9.6 trillion -- over a quarter of which is owned by foreign investors holding a financial hand grenade over our heads. Almost 10% of tax revenue now goes toward paying the interest on public debt. Budget deficits haven't dwindled either-- the 2009 gap is expected to come in at nearly half a trillion dollars.

Get ready for more dollar pain
Think of the dollar's value as the nation's stock price. If a company spends more than it makes, its net worth falls. Running never-ending deficits in your personal finances leads to eventual ruin, of course, but somehow people believe that if those deficits are formed within a country, they're spared from logic. But they're not. As a nation that spends more than it earns, the value of our stock erodes. Adding more zeros to something doesn't make it go away. Not even America can escape the confines of arithmetic.

But in march the charlatans: Pish posh! Who says a country can't spend more than it makes?! In fact, Vice President Dick Cheney once opined to the Treasury secretary that, "deficits don't matter." The thought behind this theory is that governments have the ability to print money. Alan Greenspan trumpeted this gift, stating, "There is virtually no meaningful limit to what we could inject into the system ..." Even better, the U.S. has the luxury of selling seemingly endless amounts of debt to foreigners. Sweet! Who says "there's no such thing as a free lunch"?

Sadly, there're a few holes in this theory. For anything to be valuable, it has to be scarce. Print more money, and its scarcity (value) goes down. Ask the poor folks of Zimbabwe about this. And the thought that "Foreigners will buy our debt forever" holds about as much truth as the 2001-2007 motto of "Housing prices will go up forever." Anything done in excess will recede at some point, at which time those reliant on the kindness of strangers learn the meaning of the phrase, "In over your head."

Just to clarify how serious foreign investors take this issue, last week a former member of China's central bank reiterated the consequences of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) troubles by warning, "If it is not the end of the world, it is the end of the current international financial system.'' Mm-hmm.

But back to the debt load. Here're some numbers for you to mull over:

Year

Consumer Debt

National Debt

Debt Growth

GDP Growth

2001

$1.89 trillion

$5.81 trillion

3.83%

0.8%

2002

$1.99 trillion

$6.22 trillion

6.87%

1.6%

2003

$2.10 trillion

$6.78 trillion

8.01%

2.5%

2004

$2.22 trillion

$7.38 trillion

8.00%

3.6%

2005

$2.31 trillion

$7.93 trillion

6.75%

2.9%

2006

$2.41 trillion

$8.50 trillion

6.62%

2.8%

2007

$2.55 trillion

$9.01 trillion

5.85%

2%

Q2 2008

$2.57 trillion

$9.63 trillion

5.46%

1.9%

Sources: Federal Reserve, U.S. Treasury, Bureau of Economic Analysis

Yes, consumer and national debt grew almost three times as fast as GDP over the last seven years. If you ponder these numbers for a while and ask yourself, "How much longer can that continue?" and conclude, "Not much longer," you're onto something.

OK, enough ranting
I'd expect you to raise an eyebrow if I told you the dollar was about to turn into confetti in the next few years. It isn't. But what is practically written in stone is that consumers and governments alike will eventually be forced to spend within their means, and higher interest rates are all but guaranteed when foreign investors begin to question our ability to service debt without overheating the printing presses. Add it all up, and the dollar's woes are far from over.

For related Foolishness:

Fool contributor Morgan Housel owns shares in Procter & Gamble. Coca-Cola is a Motley Fool Inside Value selection. eBay is a Stock Advisor pick. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2008, at 9:44 PM, maiday2000 wrote:

    I don't disagree with everything in this article, but there are some problems because dollar weakness is a relative measure. The USA's debt to GDP ratio is still LESS than that of the two econonies whose currencies we compare ours to when we discuss dollar weakness: the Euro and Yen. We still have a much more dynamic and free economy comparatively speaking, so problems here will normally correspond to even weaker economies abroad. Of course, there is still the possibility of stifling environmental and labor regulations with a coming presidential administration that would align us more with our overseas counterparts. This would certainly destroy wealth and economic growth, and likewise the relative value of the dollar.

  • Report this Comment On August 29, 2008, at 9:08 AM, idealsun wrote:

    Of course those two countries you refer to absorb the cost of free health care to all their citizens.

  • Report this Comment On January 05, 2009, at 2:25 PM, smelton87 wrote:

    Here are some thoughts on the Treasury bubble and what it might mean, going forward.

    http://experienceiseverything.blogspot.com/2009/01/dollar-te...

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