The housing market remains in the dumper. U.S. stocks – despite a rally – are still 22% below their record highs of two years ago. And the "official" unemployment rate remains at a heart-stopping 9.6%.
With their knees almost ready to buckle under such burdens already, how will American consumers respond when clothes, computer accessories and other key consumer staples at their neighborhood Wal-Mart Stores Inc. (NYSE: WMT) undergo an overnight price hike of 30% to 60%?
As the United States aims to increase exports by debasing the dollar, a global currency war is underway that could swallow consumers and investors if they don't prepare for the likelihood of a weaker dollar.
The United States, China, Switzerland, Brazil, South Korea, Australia, Japan have all entered the war, trying to bring down their currencies to boost exports and fuel growth. Countries are vying to win the "race to the bottom," as it's been called by Money Morning Contributing Writer Peter Schiff.
"Given the U.S. dollar's status as the world's reserve currency, America's oversized status as the world's biggest consumer, and the influence of overseas export-oriented businesses on their home governments, the falling dollar is a difficult issue for many countries to ignore," said Schiff. "And with the imminent arrival of a second round of 'quantitative easing' from the Fed, the big guns of dollar destruction are being locked and loaded. The move looks poised to set off a frantic race to the bottom among global currencies, which will have important ramifications for every investor. Unfortunately, this is one race the United States is poised to win."
The dollar last week sank to its lowest level since January when measured against other major currencies.
The falling dollar means exports will rise, increasing productivity, and proponents of a weaker greenback argue that the change could spur job growth. But if the dollar continues to lose purchasing power, foreign imports will cost more, and the deals on beloved U.S. discount stores' shelves will disappear – hurting U.S. consumers who are still regaining post-recession footing.
A steep climb on the price tags of usual "low-priced goods" would slow the U.S. economic recovery and investors may find portfolio gains eradicated if they haven't prepared for a weaker dollar.
"Against this backdrop, one of the smartest things for investors to do is buy those things that not only appreciate amidst failing fundamentals, but which preserve their wealth at the same time – case in point gold and other precious metals," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Commodities may drop in the short term, but any such moves will likely be reviewed in history's rearview mirrors as buying opportunities, for at least the next ten years."
Money Morning Contributing Editor Jack Barnes outlined last week seven ways to profit from the global currency war, noting a situation like this creates opportunities investors don't always get to explore.
"The era of 'friendly globalism' is over," said Barnes. "It's been exposed for what it always really has been – a series of negotiations. Now, however, the niceties and decorum that were always displayed to the outside world are gone, having been replaced by hard-ball/take-no-prisoners economic tactics. In that kind of an environment, however, some very interesting profit opportunities can crop up."
This prompted last week's installment of the Money Morning "Question of the Week": Are you ready for a global currency war that could drop the U.S. dollar to new lows? How have you prepared for currency changes that could affect your investments as well as your consumer habits? Do you fear the outcome of the "race to the bottom," or welcome a weaker currency that could boost U.S. exports and strengthen economic recovery?
The following reader responses address frustration in the devaluing of the U.S. dollar, and how investors are preparing for the inevitable "race to the bottom."
All Losers, No Winners in "Race to the Bottom"
I certainly expect to see the dollar drop to new lows versus gold and silver, but I'm not so sure about relative to other currencies. Japan, Brazil, Switzerland, and numerous other nations are trying to push their currencies down versus the dollar, while China is trying to keep its value relatively constant. Why should we assume that these other countries are any less competent at printing currency than we are?
The whole idea of trying to build a stronger economy by weakening our currency is idiotic. It is a logical outgrowth, however, of central banks and fiat currencies, and I can't help but feel that if the bankers have their way, they will print more and more money, and use it to buy everything of value before it is totally devalued, leaving us with piles of worthless paper, and little if anything else. I will plan to hold onto my gold and silver, and other real property, for as long as I can, but if they are not stopped, I think we are toast.
I keep having this fantasy that the next Congress will impeach Bernanke, but I really don't expect it to happen.
– Gordon F.
All About the Gold
Am I ready? Is anyone? I stacked a little gold and silver. There's not too much I can do, other than tell folks it's happening. Something is!
Today, suddenly, I'm no longer allowed to convert some U.S. dollars into Aussie dollars. Cripes! I'm a resident here! U.S. dollars [are] no good to me here! Are we still trading internationally? Is the U.S. dollar still the world currency?
Something reeks to the high heavens, and my preparation for this currency war might need to be that I stay here in Australia prospecting for gold.
Need to Get Back to Basics
I've been preparing financially for two years now. The global market has changed, [and] China wants to become the leader. I hope the U.S. government has a plan if the currency war isn't settled. I believe we are already there. We all know what happened the last time things got bad – the Great Depression.
Let's face it, we are in the longest recession, the U.S. Treasury is producing more money than we can guarantee – hello! — and is bailing out some companies that should [have] been able to just fail…can anyone say, "AIG"?
We all know this is the tip of the iceberg. Wall Street and Congress need to get their act together. I see the new surge in investing will come from tech stocks and commodities.
We need to get back to the fundamentals of American ingenuity and the heartland of America. My God – we produce the largest amount of corn in the world!
– Robert A.
Armed and Ready – With Silver
Simply put, yes.
With our national deficit reaching new highs every day, and our debt to other nations, the dollar can't hold its value. China is already talking about cutting us off from borrowing more money. Once that happens the dollar will decline dramatically and history has shown in times of monetary troubles people buy gold and silver. Silver should have a 16:1 ratio compared to gold and should be priced around $66.00 right now.
Another fact is that China has let its citizens buy the gold and silver where they were not permitted before. This – along with the declining dollar – means silver is set to skyrocket. I humbly would say with much certainty that it will hit $100.00 before 2012, although I really believe it will happen much sooner.
– Gary S.
Not Everyone is Ready
Can everyone prepare for such an eventuality? No.
Some will win because by luck they are in the right thing or have enough cash or precious metals to sustain them. Most people will not buy anything that is not essential. When this happens we know the result.
And 90% of all people will ask, "What happened?" when it's all over.
– Louis F.
[Editor's Note: Thanks to all who responded to last week's "Question of the Week" feature regarding the global currency war. Be sure to answer next week's question: Are you vulnerable to this state-and-local government budgetary squeeze? Have you seen – or are you expecting – spending and service cuts and big tax increases? Is your retirement tied to this public-sector-finance disaster? Would you consider switching jobs, or perhaps even moving to escape this public-budgetary fallout? Finally, as an investor, do you trust municipal bonds, or are you now avoiding them?
Send your answers to firstname.lastname@example.org.!
Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at email@example.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
News and Related Story Links:
- Money Morning:
You Heard It Here First: A Global Currency War is Being Fought – And There Will Be No Victors
- Money Morning:
Global Currency Wars: Three Ways to Profit From the "Race to the Bottom"
- Money Morning:
Controversial House China Tariff Bill Will Take America Down the Wrong Road
- Money Morning:
Seven Ways to Profit From the Worldwide Currency War
- Money Morning News Archive:
Question of the Week Feature