INVESTING: Weaker dollar could be a major step back for America

Treasury Secretary John Snow resigned recently, and President Bush picked Goldman Sachs CEO Henry Paulson to replace him. When Snow took the job, there was rampant talk that he favored a weak dollar policy, and the same buzz is now surrounding Paulson. I am not sure the talk is warranted, but I know a weak dollar policy is insane.

John Snow’s official line on the dollar has been to let the market work it out. He accused China of intentionally keeping its currency cheap in order to keep the stuff they sell us cheap. I agree with Snow’s market forces idea and his accusations against the Chinese. But I think that, behind the scenes, he was in favor of a weaker dollar, with the full backing of Congress and the White House. And this is where the insanity starts.

The Treasury secretary is merely a puppet, so Paulson is nothing but a mouthpiece for Bush and Congress. There seems to be an increasing call from both parties for a weaker American currency. The intentions here are good, but I have news for you: The road still leads to the same place.

Here are the more relavant reasons why a weaker dollar has the potential to create havoc both here and overseas.

Over the last 50 years, America has painstakingly convinced every major government that they should hold U.S. dollars as reserves instead of gold. And we have been successful. The globe is literally awash in dollars. I was in El Salvador a few months ago and I was a little surprised to find out the country doesn’t even have its own currency. It uses U.S. dollars instead.

Now that every central bank on the planet is chock full of dollars, we slowly let it be known that we support a devaluation of their asset. What would you do if you had a bunch of something you knew was going to be worth less in a year? You’d sell-and sell fast.

That’s what has been going on in the last four years, and it is why the dollar has declined. The short-term result is that Americans can’t buy stuff from other countries for as little as we could before. And that’s supposed to be good?

On the international market, oil is priced in dollars. As the dollar weakens, all things being equal, oil gets more expensive. Higher energy costs are starting to cause inflation, which is something we don’t want. Driving the dollar lower will help keep oil prices high, which will keep inflation high. I get dizzy thinking about how the Treasury and the Fed are going to bail us out of this mess.

A major reason Democrats support a lower dollar is because, in theory, it makes domestically produced goods more attractive to other countries. This makes the unions happy because it should fire up our factories again. But this is nonsense.

A factory worker in China works for a dollar a day. Do you know how much our currency would have to depreciate to compete with a dollar a day?

The result of a weaker dollar is probably a spiral of inflation, decreased standard of living, and a major step back in our global position. The only saving grace is that most other nations are also playing this dumb race to the bottom, and their balance sheets don’t look any better than ours.

But I don’t like it, not one little bit.