Consumerism and the Weak Dollar

By Benjamin Artz

The weak dollar has become a topic for discussion in recent years as it has fallen in value relative to most currencies.  However, both the causes and the consequences of the weak dollar are often misunderstood.  The value of the dollar, just like any product in an open economy, is dictated by its supply and demand in a free market.  Although many want to point fingers and blame specific entities, the fall of the dollar in recent years is not the fault of one individual but many and may not be such a bad thing.  

During the 1980s the US changed from being the world’s biggest creditor to the biggest debtor.  This means that the US economy began taking out enormous loans from foreign countries in the form of imports.  China is this country’s largest creditor, holding roughly $1.4 trillion in foreign reserves, most of which are dollars.  It overcame Japan, a relatively close second, which holds roughly $900 billion in reserves.  Since Chinese and Japanese imports are so popular here in the US, we must supply more dollars to China and Japan to pay for their imports.  The increase in supply of dollars decreases the value of the dollar relative to those currencies.  Therefore, this country’s rampant addiction to consumerism prompted the economy to enjoy a higher standard of living now and pay for it later.

And pay for it we shall.  As the dollar value weakens, foreign countries are less likely to hold reserves of dollars as the return on their investment dwindles.  China and Japan have already shown more interest in purchasing euros rather than dollars.  This activity will further weaken the dollar as demand shrinks and will impose a burden on consumers who increasingly want to spend rather than save.

The federal government is not helping either.  The “twin deficits”, referring to the trade and federal budget deficits are oftentimes both to blame for the weak dollar.  The government is currently financing a war without raising taxes for the first time.  At a time when consumers are not saving, it forces the government to borrow from foreign creditors. 

But a weak dollar is a mixed blessing.  As the value of our currency depreciates, imports become more expensive, forcing us to scale back our foreign debt.  At the same time our exports become cheaper, raising the sales of US exports.  This is more likely to happen anyway as developing nations get richer.  In essence, a weak dollar prompts the world to hold fewer dollars in their reserves, but also to purchase more US goods and services, balancing out the trade deficit.