Saturday, October 06, 2007

Hooray! Weak Dollar Means Higher Prices, Less Choice

For years politicians have worried about the trade deficit. The answer from the economist has been two-fold:

  1. Don't worry; it won't last forever; and,
  2. The trade deficit will 'solve itself' when the dollar gets weak enough to drive up import prices so Americans can't afford as many imports.
Looks like politicians are getting their wish:

Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.

"The inflation risk from higher import prices will be the dominant initial effect," said Howard Chernick, an economics professor at Hunter College in New York. "The most immediate effect is imports denominated in dollars -- mainly oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to 15 cents more per gallon of gas at the pump."

A weaker dollar can help narrow the U.S. trade deficit by making America's exports more affordable abroad...

On the other hand, the pressure on the dollar is increasing the international buyout appeal of American companies and real estate -- and Main Street itself might end up on the auction block.

The weaker dollar will also affect Americans in the long term in ways they might not have even considered, if companies here have trouble affording capital goods.
Chernick cites as an example Europe's leadership in producing wind power technology. It's a cutting-edge niche market that is suddenly even more expensive for the U.S. energy industry as the euro gains more muscle.

"The cost of increased reliance on renewable energy just went up -- so more pressure to build more coal power plants," he says. The dynamic can have far-reaching consequences.

To be sure, the effect is not all one-sided. American exports become cheaper and more expensive, and foreign tourism to the US is likely to increase. However, a weak dollar and a narrowing trade deficit isn't something consumers should look forward to.

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