Weak Dollar Good? How is that possible?

For those not practicing the fine art of Ostrich-ing (hiding your head in the sand), you will note that the dollar is performing poorly against most (all?) international currencies at this time. Of course, the media is reporting this as yet another indicator that times are tough.

Alas, all is not as clear when assessing the economy. In fact, a “weak dollar” has some significant benefits–especially for the “average” American.  And, for those readers here for Supply Chain information, the impacts of the dollar are felt throughout.

When the dollar is weak, it means that a dollar can buy less of a good or service produced in a foreign nation. BMWs and Computers can be more expensive. The costs to produce haven’t gone up, but rather the relative cost to produce when exchanging currencies. The result is we pay more (and buy less) imported items. keep in mind this also means the price of oil increases. This not only impacts us at the pumps but also increases the cost to transport goods. if the cost to transport goods goes up, consumers are more likely to purchase locally. (And this can mean locally produced since the cost to transport is most likely included in the price.)

But, it also means that goods and services produced in the United States are now more affordable in markets overseas. This means that, assuming we produce goods/services that people want, we start to export more.

Result? Imports–down. Exports–up.

What else does this mean? It means that here at home “American made” once again becomes a sign not only of (we hope) quality but perhaps affordability. Consumers may be paying more for everything, but if “American made” products are once again affordable (relative to the no longer “cheap” imports) then demand for these products should increase at home, as well as abroad.

Win! If demand for US made products goes up, we will find that production will increase. When production increases, employment increases. To top it all off, if energy prices continue to climb, the benefits of “off-shoring” (low labor costs, lessened regulations, among others) starts to be off-set by the increasing costs making “re-shoring” more plausible. Jobs come home.

One final note. I mentioned a few times the increasing costs of oil, and the impact on the pump. What would the silver lining be here? Think “Green.” Market forces (the “invisible hand” of Adam Smith) tend to be the best shaper of policy. Better than government, and far more successful that any promises of any politician seeking to create “Change.” I won’t speak for you, dear reader, but as you know I have started to look for alternative energy sources in my daily life, starting with a hybrid automobile. As petroleum prices increase¹
consumers start clamoring for alternatives. This creates markets² for alternatives.  Once the demand for alternatives reaches a point where the demand makes production viable, we will see alternatives flourish.  We are already seeing this with hybrid autos.  We are seeing the early signs of this in other energy sources as well, including solar and wind. But these discussions belong in another post.

Is it all buttercups and roses?  No.  There are disadvantages to a weak dollar.  Overall prices do go up.  Trips overseas become more expensive. I never argued that there weren’t disadvantages.  It just seemed that it was time to point out that there are some significant advantages to this shift in the dollar.

“Reading Rainbow Moment” To read more about strong, and weak, dollar performance, check out the Federal Reserve Bank of Chicago’s site and specifically their page discussing this very topic.

^1. note, I don’t say fossil fuels. Read more here)

^2. market refers to the group of consumers or organizations that is interested in the product, has the resources to purchase the product, and is permitted by law and other regulations to acquire the product.