 Why a Weak
Dollar Hurts U.S. Manufacturers
Peter Schiff
Oct 12, 2007
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.
For a more in depth analysis
of the tenuous position of the Americana economy and U.S. dollar
denominated investments, read my book "Crash  Proof: How to Profit from
the Coming Economic Collapse." Click here
to order a copy today.
More importantly, make sure
to protect your wealth and preserve your purchasing power before
it's too late.
Discover the best way to buy gold at www.goldyoucanfold.com, download my free
research report on the powerful case for investing in foreign
equities available at www.researchreportone.com, and subscribe to
my free, on-line investment
newsletter.
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 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
nation's 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.
321gold Ltd
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