What the declining dollar can do for you!

Anyone who’s been paying any attention to the news the past few years will know the dollar’s had—if you’ll pardon my French—the s**t kicked out of it recently by the euro, the British pound, the Canadian and Australian dollars, the Japanese yen and just about any other hard currency you can think of, with the possible exception of Monopoly money.

Back in the early days of the euro, one dollar would buy a U.S. businessman or traveler up to 1.2 euros. By 2004, the relationship had reversed: you needed about $1.20 to buy a single euro. These days, you’ll have to hand over almost $1.50. If current trends continue, and the U.S. economy continues to fissure around the sub-prime mortgage crisis, budget and trade deficits, and rising inflation, it’s perfectly possible in a few years, we’ll be looking at the two-dollar euro.

That’s not the currency markets gently tinkering around with value—it’s a wholesale readjustment of global power. Not to beat about the bush on this, as U.S. trade imbalances have soared, as we’ve increasingly become a debtor nation, as our global authority has ebbed through the over-flexing of our hard-power military muscles, so the world’s faith in the greenback has gone all squirrelly.

And, one way or another, that’s going to end up affecting all of us.

Since the United States imports more than we export—and since we’re hopelessly reliant on dollar-priced oil imports in particular—as the dollar goes less far in the global mart we’ve so assiduously created in the post-Cold War era, so it costs more to be an American and to consume with the wanton abundance we have grown accustomed to. That four-dollar gallon that’s peeking its ugly mug around the corner at you, sure, a large part is to do with soaring global demand; but another element in the mix is that the oil market is priced in dollars. And as the dollar declines, buyers overseas can afford to spend more dollars per barrel in order to secure the supplies they need. And that extra competition for crude oil pushes the price up for U.S. consumers. The same holds for an array of other natural resources, from copper on up to diamonds.

That said, the dollar’s fall isn’t all bad for business. If you’re a dried-fruit producer trying to break into the German market, for example, likely as not, you’re experiencing boom times. Why? Well, if your domestic-production costs lead you to set a price for your produce at, say, one dollar per unit, not too long ago you were having to charge your German customers about one euro. Today, with the dollar heading south, you’re only having to charge them two-thirds of a euro. In other words, your goods have become more competitive internationally. What’s bad for the United States as a whole isn’t necessarily bad for all individuals.

In fact, in a region like Sacramento, home to many high-tech and agricultural industries, at the heart of one of the country’s great tourism destinations, the dollar’s decline could, in fact, prove a boon for business. If you’re thinking of hitching a ride on the export express, now’s a pretty good time to climb on board.

“In my office, my phone’s ringing off the hook,” says George Tastard of the U.S. Department of Commerce’s local U.S. Export Assistance Center. Tastard, who works out of a small office in a strip mall near Cal Expo, helps exporters in 20 Northern California counties navigate the paperwork and negotiations involved in establishing relationships with importers overseas. “My clients are telling me they are able to compete like never before. This is an extraordinary opportunity that my clients have never seen. That’s what they’re telling me. I’m seeing more activity from our local companies with Europe—medical, dental, automotive, all of the sectors where we have a competitive edge.”

What follows is a look at some of the likely winners and losers, locally, in the dollar devaluation game.

The Consumer
Overall, says UC Davis economist Deborah Swenson, the United States is “more self-contained” economically than smaller countries and economies, meaning its consumers can better weather a currency storm. Generally, Swenson believes it is the higher-end consumers, “the people who want to travel to Europe,” and the purchasers of exclusive European products, who will see their consumption choices spiral in cost.

However, the rising price of oil will clearly hit all consumers hard, but lower-income consumers the hardest.

The biggest loser in the dollar-decline saga is the low-income suburbanite or ex-urbanite who has to drive a fair distance to work each day. Absent viable, city-centered, public-transport alternatives and with hybrid vehicles beyond your price range, there’s little getting around the fact you’ll be spending far more of your already scarce dollars on your commute. If you drive a gas-guzzling SUV, you might well find yourself up a creek with only a costly combustion engine to see you home.

“With the U.S. dollar falling, it greatly impacts the price we pay for crude oil. If the dollar stays where it is, it’ll get even worse,” says gas price analyst Jason Toews, co-founder of www.sactogasprices.com. “I wouldn’t be surprised to see the national average edge up to $4 next summer, with many parts of the country being over $4. We’re going to have to live with these high prices for some time.”

How will people adjust? Well, since they have no choice but to drive to get to work, many will likely cut other spending. The weak holiday-season retail figures reflect this, as do the growing numbers of hungry people standing in line at food banks. “It will drastically impact small businesses,” says Panda Morgan, director of the Greater Sacramento Small Business Development Center, gloomily. “Consumers will cut back on what they spend—oil [prices have] a lot to do with it. There will be businesses closing.”

The biggest risk of higher gas prices: they trigger an inflationary spiral combined with an economic slowdown, growing unemployment and rising interest rates—the much-feared perfect-storm ingredients for the “stagflation” that characterized much of the gloomy 1970s. “It all runs downhill from there,” Morgan asserts. “Everybody has to raise their prices.” However, because organized labor is so much weaker than it was 30 years ago, companies may be better able to tamp down costs and price hikes by keeping a peg on wage increases—which will be bad for people in their capacity as workers, but good for them when they put on their consumer hats at the end of the work day.

In the short-term, while imported goods at the high end of the market (Italian clothes, luxury artisan-produced foods) will likely see price increases, the cost of imported goods from China and from smaller Third World economies will probably not rise much. In other words, if you shop at Wal-Mart, you’ll probably not experience sticker shock anytime soon; shop at upscale boutiques, however, and you may be in for unpleasant surprises.

In the long-term, as the dollar falls, consumers will likely see more “Made in America” items, as it becomes more affordable for big companies to set up manufacturing facilities within the United States. See enough “Made in America” stickers, and we’ll likely be able to go on consuming as brazenly as ever. But if domestic producers don’t step up to the plate in sufficient numbers, eventually a weaker dollar will mean higher prices for imported goods and painful choices as you walk down those Target aisles.

The Importer
From Jaguar car importers to chic clothing stores and high-end food markets, the dollar’s decline is bad news.

Rick Minderman has worked for Corti Brothers grocers since 1977, when he was hired on as a 17-year-old. He is currently owner Darrell Corti’s personal assistant, his second-floor office adjacent to his boss’s chaotic office, crammed floor-to-ceiling with books on everything from antique French wine-making tools to Italian art and histories of Eurasian agriculture. Exotic liqueurs and condiment bottles jockey with religious icons and Japanese watercolors for what little shelf and floor space remain.

Corti Brothers is Sacramento’s premier importer of specialty foods. Want English crab spread, top-shelf Italian canned tuna, French escargots, Australian walnut loafs or any number of rare alcoholic beverages, and chances are you’ll make your way to this store.

Not surprisingly, Minderman is keeping close tabs on the dollar’s decline. A gentle-looking man, with short brown hair and mustache, his shirt covered with an apron, a phone and a roll of tape dangling from his belt, Minderman wanders the aisles of the store pointing out rare foods, explaining how the prices are likely to shift in years to come. “One of the most troubling things we’ve been facing is the devaluation of the dollar and the rise of the euro, because the vast majority of what we retail is European,” he asserts. But then, keen not to come off as too negative, he quickly adds that this is, at least in part, countered by the fact an increasing number of Sacramentans seem willing to spend more and more money buying high-end foods for the home table. “People are spending more on quality than on quantity,” he explains.

For some items, prices have risen rapidly. This year, Italian truffles shot up from $2,800 a pound to $4,600, reflective of the dollar’s declining value and skyrocketing transport costs—the luxury mushrooms have to be air-freighted in. (Of course, if you can afford to spend $2,800 on one pound of truffles, chances are pretty good an extra $1,800 won’t deter you.) Down the scale somewhat, artisanal cheeses brought in from France have also risen in price fairly noticeably over the past couple years.

For most produce, however, Minderman explains that wholesalers and their retailer customers are reluctant to introduce dramatic price changes overnight—it’s too scary for consumers and risks shutting down demand for produce. Instead, as the dollar has plummeted, wholesalers of European food imports have been releasing inventory from their warehouses, hoping to avoid raising prices—gambling that months down the road the currency markets will calm and mark-ups can be avoided. Surprisingly, some European wine prices have even fallen recently, as wholesalers have tired of hoarding produce in warehouses waiting for a more favorable currency climate, and have ended up offloading some fine wines at bargain prices.

At the same time, Corti Brothers has been looking for new produce from Latin America and Asia—from countries against whose currency the dollar remains strong—and has also been cultivating domestic producers, who, they hope, can create quality products that will undercut higher-priced European goods. Domestic parmesans haven’t quite hit the quality threshold gourmets look for; other cheeses have been more successful. Stopping in front of the blue cheese section of the deli, Minderman proudly points out four reasonably priced, domestically produced blue cheeses.

“If things get too expensive over there, we’ll start making them here. Prosciutto’s a good example. [Europeans] risk pricing themselves out of the market here. We’re consumers. We have power over that. If we stop buying, who’s going to buy? There is an advantage to being a consumer.”

The Domestic Market Producer
Nick Sciabica and Sons’ olive oil company, out of Modesto, has long struggled to crack the California market. A small enterprise, producing 50,000 to 100,000 gallons of oil annually, its costs have always been high. Despite transportation expenses, large European producers have consistently undercut them by somewhere in the region of $10 for each three-liter can sold.

Will the dollar decline allow Sciabica to start exporting olive oil to Italy, Greece and other traditional olive oil hubs? Co-owner Daniel Sciabica dismisses this possibility. “To do it in Europe is out of our reach,” he concedes.

But Sciabica does think there’s at least a chance European olive oil will cease being such a bargain for California olive oil consumers. And, down the road a year or two, he’s hoping to take advantage of this opening. “If the dollar continues to weaken, around the summertime, we could see price rises reflective of the exchange rate,” the businessman says. “We could see a 10- to 20-percent increase in the price of [imported] olive oil. I check the exchange rate every day, because it affects us. Here, I can slowly erode [European oil’s market share]. We’re marketing our oil in the stores. But it’s an uphill fight. It’s a long process.”

The Exporter
Timing is everything. If the dollar collapses too much too quickly, exporters and their subcontractors won’t have the resources to ramp up production and overseas sales quickly enough to take advantage. If, however, the slide is gradual, exporters can plan accordingly and, in the long-term, the weaker dollar might actually create job growth in the United States and contribute to rising profit levels for American businesses.

According to U.S. Department of Commerce data, in 2006, the United States ran a trade deficit of over $800 billion, with exports worth just over $1 trillion and imports over $1.8 trillion. Yet, with the acceleration in the dollar’s downward slide this past year, recent trends show a small reduction in the deficit. From October 2006 to October 2007, imports rose 4.5 percent while exports rose 11.9 percent.

California exports have played a large part in the export boom. The state’s exports rose 9 percent in 2006, part of a 39-percent increase from 2002–2006. In 2006, California exports were valued at $127.8 billion.

Industries that are benefiting from California’s export boom: almonds, wine, dried fruits and many other agricultural produce; computers and related high-tech businesses; and medical supplies—local companies have made a concerted push in recent years to sell their high-end products to European health-care systems.

“Our exports have increased our capability of penetrating new markets. We haven’t priced ourselves out of the market,” says Brooks Ohlson, director of the Sacramento Regional Center for International Trade Development, a pro-trade organization funded by the state’s community-college system as a workforce development measure.

Ohlson says there has recently been an increase in regional exports to Europe. Primarily, he calculates, in “gourmet food items, wines, luxury food items, specialty crop items: nuts, dried fruits, prunes, almonds, healthy snack foods, wines. [The lower dollar] helps our agricultural industries compete against their international equivalents.”

The Investor
For the rich, financial knowledge is power—it’s a large part of what keeps them rich.

Investment analysts and wealth managers build up clientele lists of the merely affluent through the filthy rich by staying one step ahead of the broader economic curve. Knowing how to successfully surf the waves of dollar depreciation is crucial to any investor in these strange times.

Local wealth manager Jonathan Lederer, a 34-year-old ex-investment banker who has worked on both coasts over the past decade, mainly advises Sacramento families with investable assets of at least $1 million.

Sitting in his small office, a football signed by the UC Berkeley Bears’ coach encased in glass on his bookshelf, Lederer ponders the dollar’s fate. In recent years, he’s invested his clients’ money more in overseas companies and in hard assets—gold, platinum and other traditional shelters from currency storms. These days, gold is trading at 30-year highs, as more people look to protect their assets from dollar failure. “I have increased my exposure to hard assets—the No. 1 being gold.” He has also shifted some of his money into blue-chip stocks, believing America’s large industrial giants will ultimately be in the best position to take advantage of the more favorable export conditions for U.S. businesses, and has moved much of his remaining funds into overseas companies.

“Most clients have over 30 percent of their assets in non-dollar-denominated stocks and bonds,” Lederer explains. “And if you factor in commodities, it’s 30 to 50 percent. Now, most advisers have a pretty diversified mix of domestic vs. international investments.”

While Lederer is keen to emphasize his confidence in the economy, he’s also aware of the long-term trends. “Structurally, it’s difficult for me to not envision a scenario where the dollar continues to depreciate. You have to be very aware, because the dollar’s related to everything relating to investments—interest rates and inflation. That impacts bond prices, stock prices, and virtually every asset out there.”

Does the falling dollar imply wealthy Americans are about to see a standard of living decline?

“Less so” than for ordinary Americans, “because they can hedge against the dollar’s decline. But wealthy people travel and buy imported goods, so they’re getting impacted by it in a lot of ways, too.”

The Tourism Industry
The combination of higher gas prices—and thus rising airfare costs—and the soaring value of the euro means anyone preparing to head to Europe for their holidays should be prepared to spend big bucks. These days, a simple cup of coffee can set you back $5 in some European cities. Rent a car and you might find yourself getting on for $10 per gallon of gas. If you’re on a budget for your travels, you’ll probably be heading to Latin America or Asia before you next take a European vacation. Of course, the opposite also holds true. For Europeans, Australians and Canadians heading to America, times are good.

Surprisingly, however, the overall number of tourists coming into America hasn’t noticeably increased with the falling value of the dollar. True, there are more visitors from the neighboring countries of Canada and Mexico, but these are largely canceled out by the fact that there are less from elsewhere.

And that’s something local tourism officials have vowed to change. After all, from emerging wineries in Amador County to the Capitol building, the region’s choc-full of interesting tourism destinations. At least in part, says Steve Hammond, president and CEO of the Sacramento Convention and Visitors Bureau, the tourism turn-off is because post-9/11, the United States tightened up visa requirements for visitors coming from many countries. “It’s taking people anywhere from six to nine months to be issued a visa,” Hammond estimates. And so, the Sacramento region, along with many of California’s other tourism hot-spots, has been lobbying politicians in Washington, D.C. to make the visa process more user-friendly, especially given current economic realities.

“There’s no question in my mind,” says Hammond, “that if the dollar continues to be devalued, that will be a good thing for tourism. However, if we were a little bit more visitor-friendly, we’d be experiencing even more visitations.”