The dollar’s current status as “the nicest horse in the glue factory” is a source of pride for some, but on the whole it is bad for the Minnesota economy.
Moreover, it may get worse, depending on how acute the smoldering problems of the eurozone get. Yet, politicians in both parties continue to prattle on about how they favor a “strong dollar.”
That misunderstanding of the effects of an expensive currency is nothing new. As econ students learn, an expensive dollar, unfortunately often characterized as “strong,” means imports are cheaper for us and U.S. exports more expensive to foreign buyers. Yes, that benefits U.S. consumers. But having an expensive dollar is bad for a nation’s employment, business profitability and economic growth.
For Minnesota, it means our farmers’ soybeans, corn, poultry and other exports are more expensive to our historic customers, as are heart valves, pacemakers and other high-tech manufactured goods. That means lower U.S. export sales and, ultimately, lower prices for Minnesota farmers.
It also means that anyone competing with goods or services imported from Europe faces stiffer competition.
None of this is new. But the underlying causes of a “stronger” dollar are different now, reflecting critical developments in the global economy.
Richard Fisher, president of the Dallas Fed, hit the nail on the head with his crack about the horse and the glue factory. The dollar is not “strong” now because of anything particularly good in our economy nor in response to the wisdom of U.S. economic policies.
Rather, the world is in a classic struggle of competitive devaluations, even though no official anywhere admits it – and our country is losing. Even China, which grudgingly was allowing its currency to rise in price compared with the dollar, is reversing course and reverting to its historic policy of subsidizing its exports by undervaluing its currency.
Should this trouble us as much as deadlock in Washington, continued declines in housing prices or slow job growth? Perhaps not, although the “strong” dollar is one reason for sluggish labor markets.
Moreover, it does matter to Minnesota farmers. Ten dollars’ worth of any Minnesota farm product would have cost a European buyer 6.3 euros in the summer of 2008. Now, it would cost 7.7 euros. That 22 percent increase in price to European farmers reduces sales. (Yes, farm profits are at record highs, but that is another long story.)
Just two years ago, a $5,000 medical device made by Medtronic or St. Jude or other Minnesota manufacturer would have cost 3,401 euros. Today, it is 3,846 euros. That gives competing European manufacturers an edge in a market of some 330 million people. Don’t kid yourself, this hurts.
Similarly, a 1 million euro profit by a European subsidiary of 3M or other Minnesota-based company amounts only to $1.3 million when repatriated instead of the $1.5 million or more in 2008.
However, as noted above, this is an old lesson being repeated for the umpteenth time, even if our politicians refuse to learn it.
The most important cause, however, is new. The euro is cheap and the dollar expensive in great part because U.S. investment funds are frantically dumping risky European investments. You may not know it, but if you have funds in a money market account, you have been lending money short-term to European banks so they could buy long-term bonds issued by Greece, Portugal and other countries on increasingly shaky fiscal legs.
Ditto if you still have a defined-benefit pension plan. Virtually all large institutional investors have some exposure to European sovereign debt, even if only indirectly by buying the commercial paper issues by European banks. To the extent this applies to government employee pension funds, taxpayers in general are on the hook.
Yes, U.S. money managers are frantically bailing out, as are many Europeans who can. Last spring, U.S. money market funds reportedly supplied more than 35 percent of all the short-term borrowings by eurozone banks. That figure undoubtedly is lower by now.
However, as in any emergency sale, the price is not always what you want. The mass exodus by U.S. fund managers is one reason $1 million invested in Europe in 2008 would be only about $867,000 today because of the stronger dollar.
Yes, the dollar was briefly more expensive earlier this year, and no, there is not much we can do to counter its rise. But don’t be deluded that this is good for our state’s economy.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.