The sky isn’t falling just yet, but the American dollar certainly is. And if it keeps falling — a prospect more likely by the day — it is bound to have dire consequences for Americans and the U.S. economy.
Wednesday the U.S. dollar fell to $1.3360 against the euro, its lowest value since 1992. This is a continuation of a trend of rapid drops over the past months. As one of the main concerns foreign investors have is the record U.S budget deficit, which does not show any signs of changing for the better anytime soon, the effect will likely not abate for some time.
The average American may say, “Who cares how many euros I get for a buck?” But it’s far more important than how many euros you’d get if you left for Paris in your private jet for the weekend. Even those that are not members of the jet-setting elite will feel the pinch of rising exchange rates, as they will affect any products the United States is importing — and that’s a lot.
The news of the historic low point of the dollar came the same week as a statement released by Wal-Mart, the world’s largest retailer. The company said $18 billion worth of their merchandise this year will be coming out of China, a 20 percent increase from last year, a number consistent with the yearly growth rate the corporations saw in Chinese-manufactured goods.
As it is evident Wal-Mart is dependent on cheap goods from China, a hike in the exchange rate would have to be handed on to the customers, only one of many instances where a devalued dollar would directly affect U.S. citizens.
What makes the downward spiral of the U.S currency even more dangerous is that the more the dollar loses its value, the more alluring the incentive to dump dollar holdings is to others. The sooner they get out, they may think, the more they can cut their losses.
Over the last year alone several countries signaled they are abandoning the dollar to invest into other currencies for that reason. Most notable was Russia’s decision to switch from the dollar to the euro as basis for all oil exports.
A statement from the Chinese government indicated the country would keep their government-controlled holdings of dollars — at least for now. But even the rumor alone that China was thinking about cutting the dollar loose sent shivers through the international stock market, causing it to dip even more.
Of course China has an interest in keeping the dollar stable, as the United States is one of its main trade partners. Similar to Saudi Arabia’s attempts at keeping the oil price stable in order to keep the incentive for Americans to conserve oil from, becoming financially pressing and thereby the cash flowing, China would hamper its own exports by dumping their dollar holdings.
But if the dollar keeps plummeting, there is no telling whether China might change its mind as other countries have over the past months.
For the vicious circle of countries and large investors pulling out of the currency — which is in turn causing others to do the same — to be broken, the U.S. government will have to take a more proactive role.
But for that to happen the Bush administration would have to acknowledge that a problem exists. Past statements such as Vice President Dick Cheney’s (who is quoted in former Treasury Secretary Paul O’Neill’s book The Price of Loyalty as saying “Reagan proved that deficits don’t matter,”) would indicate that any such change of heart is still some time off, to say the least.
The war in Iraq is also costing more and more money. Putting the argument of the war’s necessity aside for the moment, it is apparent that the war is costing more than what the Bush team had hoped the so-called “cake walk” would clock in at. If the situation does not change any time soon, Iraq will require even more resources as military actions keep continuing and another 12,000 troops have been deployed.
The future of the dollar, at least for now, looks rather gloomy. Until our government realizes that a rampant deficit does us more harm than good, maybe American parents shouldn’t buy their children’s Christmas presents at Wal-Mart. Get the kids some euros instead.
Sebastian Meyer is a junior majoring in geography and is the Oracle’s Opinion Editor. firstname.lastname@example.org