Dollars and sense

 

 

Oscar Abello

The Canadian dollar had often been the object of America’s collective ridicule, a symbol of a misguided sense of cultural superiority and a childhood wonder for many show-and-tell days of youth.

Nevertheless, there comes a time in life to learn the truth about Santa Claus, the Easter Bunny and the Tooth Fairy. Last Friday may prove to be a comparable rude awakening, because for the first time in over 30 years, the U.S. dollar ended the week worth less than the Canadian dollar.

The falling value of the U.S. dollar is not news; the recent years of dramatic spending growth by American consumers, coupled with federal budget deficits, have caused deep trade deficits that flood foreign exchange markets with U.S. dollars.

Add to that the on-going credit crunch and subsequent interest rate cut, and there is even more dumping of dollars to find safer assets.

Just like Santa Claus, a spendthrift existence is at best a jolly figment of imagination and at worst a social pathology of gluttony. Over-consumption has reared its ugly head; the U.S. dollar has fallen to embarrassing lows.

The simplest and most direct way to tackle this problem is to raise federal income taxes without raising federal spending. At the same time, more development assistance would help other economies build roads and other infrastructure to facilitate economic activity, creating more markets for American-made goods and services.

Slowly, as other countries demand goods produced in America, they will demand U.S. dollars from foreign exchange markets to pay for those goods, in the process restoring strength to the dollar.

Raise taxes, limit federal spending and send more of the limited spending overseas for development assistance. In economics, such a course of action is a fundamental way to compensate for the deep U.S. trade deficits that flood the world with U.S. dollars. In politics, such a course of action is as likely as winning the lottery twice in the same year.

It is not a matter of stopping imports; it is a matter of balance, so that those countries that depend on exporting to the United States can benefit from trade without having to worry about being paid in weakening dollars.

Exchange rates are a powerful expression of how all our fates weave together. Less-developed economies around the world have gotten into the habit of using international trade to find their way out of poverty. The weakening dollar threatens to knock them off track because so many of those countries export goods to the United States and, increasingly, China.

Since they remain loosely linked, the yuan weakens as the dollar weakens, to a lesser degree. In terms of purchasing power, the United States and China are the two largest markets in the world. Usually, weaker currencies will slow imports, but U.S. spending habits and China’s rapid growth are dampening the usual effect.

To some degree, China may feel pressure to let the yuan float in order to help sustain the less-developed economies from which they purchase raw materials for production. There is some hope because as slow as Chinese policy moves, the past 30 years stand as evidence that it is capable of making progress. Little of the same could be said of American politics today.

Continued record spending growth by American households and government will continue to render consequences that manifest themselves far beyond American borders. The World Bank estimates that 70 percent of the world’s poor depend on agriculture for income. Coffee is a major agricultural export from the developing economies where many of the world’s poor reside, and it is America’s top agricultural import. Coffee is second only to crude oil, in terms of yearly international trade value.

Those developing economies suffer from payment in dollars that are worth less every week, all because of American overspending.

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Oscar Abello is a senior economics major from Philadelphia, Pa. He can be reached at [email protected]