You'd probably never know it, but Richard Nixon has been picking your pockets.
Ever since the former president agreed in 1971 to suspend the dollar's convertibility into gold, the value of the greenback has been backed simply by the capitalistic vision that is America -- more specifically, the government's ability to tax citizens like you. Without anything tangible backing its value, you might be stuffing your wallet with confetti, for all you know.
OK, that's an elephant of an exaggeration. Tricky Dick isn't pillaging your bank account, and he was probably looking out for America's best interests when he decided to take those drastic actions. He isn't at all responsible for the dollar's current misgivings. He died more than a decade ago, making pocket-picking somewhat difficult, but that's beside the point.
Here's the real issue: Ever since we ditched the gold standard, the government has found it far too easy to create cash, and we've become complacent, printing money like it's nobody's business. Gargantuan trade deficits and unbalanced budgets have left the value of the greenback withering away, compared to its global peers. That, my friends, can cost you some serious coin.
The Cleavers ain't got nothing on us
The globalized economy has become one, big happy family. Countries are as reliant on each other as they've ever been for economic prosperity. Shanghai relies on Seattle to buy its knicknacks, Dublin needs Detroit to crank out pickup trucks, and Raleigh counts on Riyadh to produce oil. You scratch my back, I'll scratch yours.
When the value of the dollar falls, two things happen in the global economy:
- The goods America produces and sells to other countries get cheaper and more competitive.
- The price of goods America buys from other countries become more expensive for us here at home.
The first part of the equation can benefit you and me. As my Foolish colleague Bill Mann pointed out earlier this year, a falling dollar can be a boon for companies like eBay
It's the economy, stupid
Kind of. The bad news comes when you factor in the second part of the equation: Most U.S. citizens aren't multinational corporations. They're typical nine-to-fivers who, partially because of the falling dollar, have been saddled with soaring energy bills, surging prices at the grocery store, and a reliance on cheap, imported goods for everything from hairbrushes to cell phones.
The next time you go to a Best Buy
While our economy as a whole trumps all others in terms of GDP, we rely on the rest of the globe to produce a tremendous amount of what we consume. The United States is on pace to import more than $400 billion of oil this year. And since oil and other commodities are priced in dollars in nearly every financial market around the world, a weaker dollar translates into higher prices for you and me here at home. For consumers already facing economic indigestion, that can really burn.
Makin' a run for the broader
But there's a broader reason why you shouldn't welcome the weak dollar, besides higher prices. We're not just addicted to foreign merchandise; we're hooked on foreign money, too. When Citigroup
That is, as long as investing in the United States remains worth their while. In the past five years, the dollar has lost roughly one-third of its value against the euro. In less than a year, the dollar has tanked almost 20% against the Japanese yen. If our currency continues to undermine returns, foreign investors may conclude that the USA isn't the de facto choice for international capital, and take their cash elsewhere. Sound scary? I agree.
P. Diddy was right: It's all about the Benjamins, baby. Next time you hear someone spout off the glorious benefits a weak currency brings, remember that no economy has ever failed because its currency was too strong. Many, however, have bitten the dust over weak ones.