If you are trying to follow economic trends, you face an incredible problem just looking at the headlines. Some talk about inflation and the weakness of the dollar. Others, sometimes on the same page, talk about the strong dollar and what that implies for trade flows. Let’s try to sort this out.
There are three things you can buy with a dollar: goods, services, and other currencies. Mostly we all buy goods and services in the United States. The value of the dollar has been hit very hard with inflation. You cannot buy as much, meaning the dollar has lost value over four years. How much is up for debate. The low estimate is 20 percent but adding in all the goods that the official inflation index excludes sends the number to 30 percent or 50 percent or higher.
What you do not usually do with dollars is buy foreign currencies, unless you travel out of the country often or day trade for a living. What you discover when you are out of the country is that the dollar is actually very strong when you are purchasing Pesos or Euros or some other currency. It’s the strongest currency in the world, the “world reserve currency;” that is, the one that most central banks hold (in the form of debt obligations) as assets.
I’ve seen even extremely intelligent people get all this mixed up. They ask, “How can inflation be high when the dollar is so strong?” The answer is that it depends on what you are buying. If you are buying goods and services in the United States, the dollar has never been weaker. If you are buying foreign currencies, the dollar is still very strong. That means that it goes much further when you are shopping in Eastern Europe or Mexico or practically anywhere else.
What else does this imply? A strong dollar means cheaper imports. It’s not different from shopping in foreign countries now where your dollar buys much more. If you import those goods to the United States, they will be cheap. That is a blessing to U.S. consumers but very much vexes American producers.
This is why we live in this strange situation in which U.S.-produced goods have been subject to so much inflation, whereas imports have not risen in price much at all. You can go on Amazon right now and discover this. If you are buying textiles like sheets made abroad, they are still reasonably priced. It’s the same with many technologies made elsewhere.
Most goods mainly made in other countries have not been subjected to much inflation at all. Textiles and electronic goods are up about 3 percent or so over four years, mainly because they are produced abroad and then imported. This is because the dollar is strong on international exchanges.
It’s exactly the reverse for U.S.-made goods. This is why everything you buy that is tied to U.S. soil is so high-priced right now. This is why restaurants are so expensive. All food is expensive. Housing and rent are sky-high. Insurance on cars, health, and homes has risen unspeakable amounts. It’s why concert tickets are high, and so are hotels and vacation prices domestically. Anything that is physically tied to the United States, and hence mostly produced with U.S. dollars from beginning to end, has been subjected to so much inflation.
This might account for a large part of the anomalies we see in inflation data. Much of the inflation has focused on domestic goods with production based in dollars. These are either minimized in the official data or excluded entirely. Among that which is produced domestically are loans, and interest rate inflation has been extraordinary. But none of that is included in the consumer price index (CPI).
The CPI, however, does include many of the products produced in foreign countries, and those simply have not been subject to high price increases. This is because of the strong dollar on international exchanges.
We are then faced with a peculiar anomaly. During this high inflation, domestic production and consumption have been hit extremely hard, even as foreign production has not. This has amounted to a huge subsidy for imports and a punishing tax on domestic production. It’s why U.S. business is so desperate to lower labor costs and shed full-time jobs. It’s all about trying to make the balance sheet work.
This also might account for the growing political consensus for tariffs. As much as the Harris campaign warns against Trump’s proposals for high tariff walls, the Biden administration did nothing to reverse the previous Trump tariffs imposed from 2017 to 2021. They are an effort to jack up the price of imports so that domestic manufacturing can have some hope of competing.
Keep in mind that under a gold standard, in which currency valuations around the world do not fluctuate this way, and in which there is no difference between strength and weakness of a currency at home or abroad, none of this would be happening. These wild divergences are due entirely to the system of fiat money and floating exchange rates.
Under normal conditions, the problems would not present themselves so acutely. But when there is a big divergence in trends between domestic and international valuation, production structures are diverted and distorted. Then you have the rise of a political movement for protectionism. It’s not a surprise at all, and probably unavoidable.
What can be done about this? Restoring sound money, here and abroad, is the essential key. But getting from here to there is not as easy as writing a position paper. The world is seriously vexed by the problem of fiat money and there is no easy step to turning back from that. It’s possible but not easy.
Meanwhile, all domestic polls report that inflation remains the number one concern of voters. Imagine that: at the very time when the whole of the financial press is prattling on about the end of inflation, it has emerged as the number one issue for members of the public.
This is because it has only recently dawned on people that the prices of everything they actually buy (imports excluded) are not going back to 2019 prices. This means a dramatic reduction in real income for the American household.
That is how it comes to be that the dollar is both strong and weak. If you have carefully followed the logic in this article, you can count yourself among the 0.1 percent, because such complications are lost on even many experts. I get it: it is complicated. But once you understand it, much else comes more clearly into focus.
