Learning To Love a Weak Dollar

Posted by Michael at 9/25/2008 9:24 AM
Categories: Domestic Issues
The buzz of the day revolves around the collapse of the mortgage industry and the debate over the use of the public purse to alleviate the financial pain of some of the industry's major players (or more precisely, to distribute that pain over the entire tax base).

The details of the bailout plan are still in discussion in Congress, but it's pretty clear that the federal government plans to perform some kind of acquisition or offer some kind of loan program, using the contents of the US Treasury (real or imaginary) to perform a risk-based investment whose expected value is below zero. If it was actually a potentially good investment, the federal government wouldn't need to take action. Private investors would jump at the chance to take it upon themselves to do so. For example, Warren Buffet's $5B investment in Goldman Sachs shows that, at least as far as Buffet believes, Goldman Sachs is still a viable company.

In short, government doesn't make money. Government only gets involved if there's no money to be made, where businesses and investors have decided the field is barren. Fools rush in where angel investors fear to tread.

Now, I've said many times on this blog that I'm not going to pretend to be able to correlate macroeconomic policy decisions with microeconomic ramifications. What I seek to point out here is merely to echo the popular belief in the relationship between the national debt, the value of the dollar, and the impact of the value of the dollar on individual pocketbooks.

I think there's a general consensus, right or wrong, that the bigger the national debt gets, the less purchasing power the dollar holds. In actual historical analysis, there does tend to be a correlation, but, to my knowledge, raw historical economic data itself doesn't really establish a cause-and-effect relationship. That is, does the dollar get weaker because the debt grows, or does the federal government need to borrow more money because goods and services require more dollars to pay for? To what extent do these forces feed one another, and to what extent are they fed mutually by some common underlying factor?

It's exactly these kinds of issues that make me realize that economic policy debates are largely sophomoric and undignified affairs, conducted by people who purport to sound authoritative without actually knowing what the hell they're talking about. They're unsuitable for serious adults intent on solving problems and getting things done. Yes, there are self-styled economic policy professionals out there, such as Ben Bernanke or Thomas Friedman, and people do listen to them... But if you ask me, these guys know about as much about the science of economics as Asclepius knew about medicine, Aristotle about physics, or Paracelsus about chemistry.

It's also why I believe that, when it comes to government involvement in most things - especially the economy - the cure is worse than the disease. It's like having an Egyptian anatomist for a physician. It's not that he doesn't know anything. He knows some stuff, but the stuff he knows is warped and skewed. The more subtle and serious the problem, the less reliable his treatment. You might trust him to remove a splinter or even set a broken bone. But would you trust him to surgically excise a tumor? Me, I think I'd take my chances with the cancer.

And that brings us to where we are now, facing a major hike in the national debt and a federal alleviation plan whose goals are of dubious desirability and whose likelihood of achieving those goals is improbable at best. Makes me wish I'd held on to my gold last year.

On the upside, though, a weaker dollar has advantages for the country in general and for me personally.

As other currencies strengthen relative to the dollar, American labor becomes a steadily more profitable investment. The reason American companies use Mexican or Chinese labor is because it's cheaper than American labor. As the dollar drops relative to the peso or yuan, American companies will find it steadily more expensive to hire Chinese or Mexicans, and relatively cheaper to hire Americans. This means jobs that are currently overseas will return to the US.

It also means that foreign companies will begin to find it profitable to build factories here, which means that we'll grow accustomed to seeing American workers going to work in British or German or Chinese-owned factories in Minnesota and Pennsylvania. Some might find this an unappealing prospect, but I don't really see what's so bad about it. It's part of living in an integrated, globalized world - after all, we're supposed to celebrate multiculturalism and diversity, right? Besides, a paycheck's a paycheck, regardless of whether it comes from an American boss or a Chinese one.

And as for me personally, I believe a weakening dollar will actually make me a bit richer.

I believe that software development is already a fairly globally priced asset. That is, it's very, very easy for a software development firm to hire anybody from anywhere in the world, thanks to the lack of physical constraints on the development and manufacturing process of the end product. It's much easier for a British company to hire Indonesians to make software than to make cars. As such, the salary I draw is driven more by competition in the global talent pool than by the value of the regional currency. If I was paid in yuan, I'd be earning approximately the same total dollar amount as I earn now, converted to yuan. That goes likewise for pounds, pesos, rubbles, or rupees. There might be a variation by as much as a factor of two in either direction, but the variation in cost of living in the currencies' respective locales can vary by a factor of ten or more.

My debts, however, are at a fixed dollar amount. The amount I owe on my mortgage is not going to rise just because the value of the dollar falls.

This means that a weakening dollar increases the numerical value of my salary but leaves my mortgage unchanged. If the dollar were to halve in value next year, it would dent my salary, but my company would give me a raise in order to keep me around - this raise would not be a factor of 2x, but it would have to be pretty hefty, since it's very easy for me to simply find a British or Irish firm to contract my services out to from remote. My mortgage, however, would effectively drop in half, and there's nothing the bank can do about it.

So, if you're in debt (as most of us are), and you work in a globalizable industry (as most of us do), a weakening dollar can be your friend.
 
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