After reviewing Wednesday's post, Bush administration pushing dollar down or allowing it to fall? IMF chief sounds alarm, I thought of one more point that is of paramount importance. Either many people are ignoring or do not understand how a devalued dollar facilitates our giving away the country wholesale, even if in the short term it appears to help with our trade deficit.
This concept does not seem to have resonated in Washington and, along with his advisers, our president is either ignorant or avoiding the issue altogether because he does not want to discuss the remedy: everyone tightening their belt financially and taking some economic pain.
Warren Buffett has sounded the alarm many times about this subject, and I will, too. When the dollar falls in value, say 30% (each currency varies), that gives foreign investors 30% more buying power here. Yes, it is true they buy more when our goods and services are "on sale" (and we buy less of theirs). However, what if instead of buying perishables, they buy income-producing property and companies. As long as this trend continues, they would be wise to buy more and more.
A simple example: They buy a company that makes widgets in the United States. They are able to sell (export) more widgets along with their American counterparts because of the devalued dollar. Who makes a higher return on invested capital? The foreign investor, of course, because they paid 30% less for the widget company!
It gets worse from there. Where do the profits go? The American and foreign widget companies can both invest them wherever they want, and if they choose, pay a dividend to their investors. The U.S.-owned company distributes profits here. The foreign-owned company takes its profits home. This means that our devalued dollar allows the Asian investor (holder of stronger currency) to make money on both sides of the Pacific, and this movement of profits and investment capital is snowballing. The largest investor in Citigroup, the largest U.S. bank, is not American. Although this may present some interesting political dilemmas, I would be fine with this if we were not selling our assets at great discount.
The more the dollar drops in value, the more we are discounting the sale of our country, and as it escalates, we become even more dependent on that foreign influx of capital until eventually we are working for foreigners on our own soil. This is something many third-world nations experience, and unless this trend changes we could become one of them.
Washington, Wall Street and even some folks on BloggingStocks keep talking up the idea of more interest rate cuts to stave off a recession. I do not have the same fear of recession as I do the consequences of long-term economic mismanagement. I do not believe we should cut rates further, and caution all the geniuses that got us to this point that they may cut rates and get the recession anyway, and cause inflation - while giving away the country. I do not want to see people whose income has stagnated for years also lose any interest income they get due to lower bank interest rates, and then get slammed by inflation to boot.
No matter who is in power, the government is getting increasingly better at lying. Remember, they do not count the Iraq war in the budget deficit, they do not count food and energy (way up) in the inflation figures, the Social Security (current surplus) has been borrowed so much that lock-box has an "IOU" in it, we have heard the purpose of the mission in Iraq change continually ("mission creep") for four years (get your story straight, Dubya), and Bush thinks a recent 5% improvement in the trade imbalance makes up for 30% to 40% devalued dollars...and counting...and lastly, I am tired of people telling a guy ("my pal Warren") that made over $50 billion as perhaps the best allocator of resources the world has ever known that he does not know what he is talking about!
If you share some of my concerns then you should forward this story to as many people as possible including your representatives in Washington.
To find potential opportunities and verify my track record, read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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Reader Comments (Page 1 of 1)
10-26-2007 @ 2:26PM
Greg Tedesco said...
What happens to the dollar if oil is traded in Euros in the future ? If the dollar gets weaker, and more than 1/10th of Mexicans are living in the U.S. do we need to adoped a new North and South American Dollero ? Will that help us compete in the "new" global economy ? It is good to have global wealth increase, but is it good to have foreign elites own American companies ? Which companies ? If our middle class has been so over worked and impoverished, does it matter if domestic or foreign elites control us ? We can not blame others for our own weakness, over consumtion, and lack of education, maintaince, and investment. God bless America, but WE need to save ourselves.
10-26-2007 @ 3:22PM
Russ James said...
Is Bush giving away the country without knowing it?
I am truly questioning if he has the slightest idea of what his policys and his business buddies stratigies have done to this nation.
From the Iraq War (if you support the war, just put a plan together how to pay for it) to twisting or distorting the constiution.
10-26-2007 @ 4:44PM
Jill Feldstein said...
What makes you think he doesn't "know" what he's doing?
Bush's policies have moved money to his "base" haven't they, largely oil companies and war profiteers? I'd bet at that first energy summit that was surrounded with so much secrecy Bush promised the oil companies $100 a barrel oil. If you owned an oil company wouldn't you want the price to go as high as possible before you run out of oil? Not to mention global warming. I think he knows exactly what he's doing.
10-26-2007 @ 5:18PM
Jess said...
Seems like the gov doesn't care people. Cal fires buring for days...dollar all time low...foreclosure all time high....what's going on here?
You guy should check out this before you apply for a loan it will save you a lot of headaches and you'll know the truth about the mortgage industry http://www.rmdirect.net
10-28-2007 @ 8:39PM
Mr. noitall said...
Unfortunately, we don't make too many widgets or anything else in this country anymore. Me, you and our pal Warren have been warning about the weakening dollar for quite some time. I commented over a year ago that the Fed is in a "check-mate " position, and now we are seeing that I was right, they can't save the real estate & stock market & dollar by manipulating interest rates. Most likely they will fail on all 3 fronts. I also don't believe that lower rates from foreign central banks will help the inflation problem. All currencies,(except gold) are losing purchacing power. I think my idea for a back-up global currency is starting to look like a very good one, our pal Warren would be the perfect man to begin to put this idea to work.
10-30-2007 @ 9:58PM
j. james said...
Dear America U.S.A. : you made a serious mistake by allowing George Bush to become the president of this nation. If you allow him to continue this carnage in Iraq, and his many failed policies, it is certain that you will have the experience of the Romans during the rule of the Emperor Diocletian.
1-02-2008 @ 11:53PM
VIC said...
WHEN WILL THE PEOPLE WAKE UP TO THIS DISASTER OF AN ADMINISTRATION. THE PEOPLE ARE STANDING WITH AN EMPTY HOSE WHILE THE COUNTRY IS BURNING TO THE GROUND. GO AFTER THESE STUPID REPUBLICAN SENATORS WHO ARE PROTECTING BUSH'S VETO PEN SO THAT HIS STUBBORNESS CAN BE OVERCOME. ONE MORE YEAR OF THIS NONSENSE WILL TOTALLY DESTROY OUR COUNTRY. CLEAN OUT ALL OF THE REPUBLICANS IN CONGRESS. I AM AN INDEPENDENT VOTER.