The Death of the Dollar

James Pethokoukis at Reuters notes the danger of a declining – rapidly declining – dollar:

She (Sarah Palin) might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America. And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded. In his New York Times column today, Paul Krugman makes the usual case for a weaker dollar: It helps U.S. exporters and is a necessary part of a global economic rebalancing. And there is some truth in that, particularly the idea that Rising Asia will result in a less-dominant dollar. Then again, a devalued currency hasn’t exactly been a proven path to prosperity. (Ask Jimmy Carter.)

The dollar is in a steep decline and foreign governments are buying fewer dollars, switching to Euros instead. This has the odd side effect of foreign investors being able to buy up huge amounts of American company stock:

Investors outside the U.S. are purchasing companies in the Standard & Poor’s 500 Index at the cheapest valuations on record, their buying power boosted by a seven-month decline in the dollar.

The S&P 500 is priced at 19.9 times earnings, the biggest discount to the MSCI World Index of 23 developed countries since May 2003, according to monthly data compiled by Bloomberg. For Europe-based money managers, currency translations push the average cost for a dollar of U.S. profits down to 13.6 euros, the lowest level ever relative to global equities and a discount that investors in America have never enjoyed, data compiled by Bloomberg show. Overseas investors that hold almost $2.5 trillion in U.S. equities are getting a bigger slice of corporate America with each euro, yen and pound they spend just as S&P 500 companies from PepsiCo Inc. to General Electric Co. post higher overseas sales. While more losses in the dollar would cut returns, the last time U.S. stocks were this inexpensive, in 2003, the S&P 500 began a four-year, 62 percent advance.“What you’re getting is the opportunity to buy global companies that have become cheaper because of the dollar and more competitive,” said Antony Gifford, a London-based manager at Henderson Global Investors, which oversees $87 billion. “If you can buy global secular growth at a discount because it’s dollar listed, then why wouldn’t you?”

Our economy is in real trouble, regardless of how many choruses of You’re Out of the Woods, You’re Out of the Dark that The Wizard of O’s munchkin minions belt out. We’re rapidly heading toward an unsustainable economy. And the Wizard and his diminutive posse are standing by watching it
all happen.