Why a Weak Dollar Hurts U.S. Manufacturers

By: Peter Schiff | Fri, Oct 12, 2007
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The vast majority of economists are currently hailing the freefall of the dollar as a windfall for American business. While some domestic manufacturers may enjoy some initial benefits from a weaker dollar, they will ultimately suffer many adverse consequences as well. More importantly, the dollar's demise is a disaster for American consumers.

A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating.

Too often overlooked however is how the weakening dollar also works to increase costs for domestic manufacturers. A falling dollar raises the costs of raw materials, such as oil and metals, while simultaneously decreasing the relative costs that foreign competitors pay for the same supplies.

But it is not just raw materials prices that rise. Perhaps even more important will be the prices of foreign-made components that are used in American factories. In fact, many American "manufacturers" are really nothing more than assemblers of imported components. For example, take a domestic golf club company that supposedly manufactures clubs in the good old U.S.A. Such a company might import the heads from China, the shafts from Indonesia, and the grips from Mexico. The only thing the American company actually does is put the pieces together. So as the dollar loses value, the costs of importing all of the components will rise, making the finished product more expensive for Americans.

Another often overlooked cost of a weakening dollar is higher interest rates. Because a falling dollar diminishes the global appeal of dollar denominated debt, U.S. interest rates will inevitably rise, resulting in increasing capital costs for domestic manufacturers. Similarly, strengthening foreign currencies increases the appeal of non-dollar debt, reducing the capital costs paid by our foreign competitors.

Furthermore, as a weaker dollar forces up domestic consumer prices, American workers, suffering from declining real incomes, will ultimately press their employers for more generous pay raises. Rising nominal wages will eventually undermine the competitive gains associated with lower real wages that initially resulted from the falling dollar. Similarly, landlords will look to raise rents to make up for the falling purchasing power of their rental income.

Lastly, as rising interest rates and consumer prices combine to exacerbate the severity of the coming recession, federal tax receipts will inevitably decline causing the budget deficit to swell anew. A populist Congress will likely seek to impose even higher taxes on those businesses profiting during the hard times. So any advantages U.S. manufacturers might get from cheaper dollars may be lost to higher taxes.

The bottom line is that true competitiveness comes from sound money, high savings, low taxes, minimal government regulation, hard work, and the entrepreneurial spirit. Laying the hopes of America's industrial salvation on currency devaluation will only backfire, leaving American manufacturers even less competitive in the future than they are today.

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Peter Schiff

Author: Peter Schiff

Peter Schiff C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.

Peter Schiff

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nations leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

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