Two Dollars a Pound

That’s what they are saying in London, that the dollar is falling such that it will take $2 to buy one British Pound, the first time that has happened in 12 years. They fear that “more loose fiscal policy” is on the way from Washington, and have “concerns about the future of the US economy as a whole.”

Other nations are concerned as well, with Italy considering monetary intervention to prop up the falling dollar. That’s Italy, a country whose government Lonely Planet describes as follows: “Italy’s parliament has a reputation for scandal and resignation, and at times it has left Italy virtually ungoverned and utterly chaotic.” That Italy is worried about the price of American Dollars.

Even the Chinese want to get out of American currency, which will drive the dollar lower and — since China’s currency is linked to ours — make Chinese goods even lower priced for worldwide export. Unfortunately, it won’t make Chinese goods cheaper here in the States because, well, their currency is linked to ours.

There is some disagreement as to why this situation is occurring. Larry Kudlow, former Reagan advisor (and thus supply sider) beleives the drop of the Dollar against the Euro has little to do with what is happening here and everything to do with what is happening there. In a nutshell, there aren’t enough Euros, driving the price of them artificially high. Why this would effect the Pound and Yen — which float more or less freely against both Dollar and Euro — I can’t say.

Rather the “benign neglect” that international journalists speak of as the cause, I prefer to think this has been a calculated move on the part of the administration. Otherwise, John Snow might have said something about it. Why? Well, first, it’s an attempt to fix the trade deficit. When a nation has more imports than exports, that effectively funnels money out of the country. It’s also a big drag on the Gross Domestic Product. In short, you can’t have monster trade deficits indefinitely. A cheap dollar makes American goods “cheaper” overseas — encouraging people from other nations to buy them — and makes foreign goods more expensive here — encouraging us to “buy American.”

Second, the Administration was hoping to force China to de-link its currency from our own. Unfortunately, the same low dollar which is supposed to make American goods more affordable overseas makes Chinese goods cheaper too. China’s actions this week make it clear that they can play this dollar dump game too, and they are big enough to win: they have a population of over a Billion and a GDP of $6.449 Trillion, growing at over 9% annually.

Of course the falling dollar also has side effects. Aside from the international concerns detailed above, there is the fact that since oil is traded in dollar denominations, OPEC can no longer afford to pump oil for $22 per barrel.

What to do now? Jim Jubak has these tips for investing in a weak dollar world, or if you’d prefer, here’s some down to earth consumer advice from the Chicago Sun Times.