Thursday, December 23, 2004

Florida Facing Chilly 'Dollar Daze'?

Just a couple of weeks ago, the estimable Florida blog South of the Suwannee called attention to an alarming report from The Economist on the implications of the falling U.S. dollar.

Plunging Dollar

The article, titled The Disappearing Dollar, essentially points out that over the past 12 months the dollar has lost nearly a quarter of its value measured against the Euro and other world currencies. In a sidebar to the main article, The Economist explains:
"The Bush administration's apparent shift from a "strong dollar policy" in September 2003 touched off a steep slide that has continued in fits and starts. * * * While a gradual fall could help worldwide economic recovery... a sudden plunge would be bad for everyone."
A few days earlier, David Francis explained in The Christian Science Monitor that the dollar's plunge is good news for exporters and tourist destinations like "U.S. national parks" but --
... the downside could be significant. America, the world's leading importer of goods, is now buying them at higher prices. And if the dollar's dive makes foreign investors wary, U.S. interest rates may have to rise to attract buyers of federal debt.

More broadly, it's a shock to the global economy. Sunday in Germany, officials from the Group of 20 industrial and major developing countries called for the United States to cut its federal deficit, which is seen as a key factor in the dollar's fall.
* * *
The dollar is now down 50 percent against the euro since October 2000, and hit its lowest level since 1995 against a basket of foreign currencies [in mid-November].
Cheap Dollars Buy Florida Real Estate

If all of this seems like dry, uninteresting stuff too distant for those of us living under blue roofs in the Ivan War Zone to worry about, consider today's news from South Florida. The Miami Herald reports a wealthy British family has purchased all of Fisher Island, chiefly because they'll be paying for it with U.S. dollars that seem so cheap. As the Herald's business reporter, Matthew Haggman, explains, the island is an "exclusive" hideaway with 621 multi-million homes:
Located immediately south of Miami Beach's South Pointe, Fisher Island has long been home to the famous and super-rich. Earlier this month a five-bedroom condo sold for $8.7 million, considered the biggest condo resale price in Miami-Dade County. * * * Accessible by ferry or helicopter, Fisher Island's famous residents have included the likes of Oprah Winfrey and former tennis star Boris Becker.

The deal may signal heightened European interest in an already hot South Florida real estate market because of the weak dollar.

Under current exchange rates, one euro buys $1.33 in the United States. By comparison, in October 2000, one euro bought 83 cents.

Snowbirds 'Buck' the Trend, Too

Today, too, the Canadian News Broadcasting Corporation reports that snowbirds north of the border are planning to wing south in record numbers, enticed by the exchange rate between the "loonie" and the "buck":
"The Canadian dollar is just an overwhelmingly positive story," enthused Colin Ellis, research officer at the Canadian Snowbird Association.

He predicts Canadian visits to Florida will rise to two million this winter from 1.7 million last year.

For Canadians in the United States, everything from the all-you-can-eat buffet to medical insurance is cheaper.

The effect is particularly beneficial for retired people, Ellis said.

"If you're 65 years old, you know how much money you have to live on for the next year," he said. "So say you have $40,000 and the Canadian dollar goes up 10 per cent - that's a $4,000 windfall; it's huge to these people."
Normally, for areas like Pensacola that depend on tourism, a falling dollar might be a welcome development in the short run. More tourists mean more profits for the tourist industry, right?

But these aren't normal times, thanks to Hurricane Ivan. On Pensacola Beach, only three full service restaurants and two hotels have managed to open. Despite the brave face placed on things by local tourist promoters, most beach businesses remain closed. Several which are listed as having a 'target' opening date but they're likely to be months away from any semblance of normality. Even some so-called 'open' shops are operating out of a fraction of their usual quarters, under blue plastic roofs, or with limited inventory.

In the longer run, moreover, a falling dollar will fuel inflation in Florida, too. It is bound to drive up prices for everything from food to clothes to souveniers. Wages of the working poor, already devastated by Florida's four hurricanes, will come under added pressure as well. (As the Miami Herald reminded us the other day, in a hurricane "economists say the affluent lose their deductibles, but the poor lose everything.")

So, "What ails the dollar?" as Robert Kuttner asked recently upon returning from an expensive European trip. Kuttner, a columnist for the conservative Business Week and co-founder of the Economic Policy Institute, joins a growing number of economists who are worrying that --
Our trade deficit grows bigger every year, as does our budget deficit. Both deficits require foreigners to supply capital. The more capital they have to supply, the more nervous they get about the dollar * * * leaving the United States precariously dependent on two foreign central banks -- China and Japan -- to finance its twin deficits.
* * *
By continuing to increase the federal budget deficit, most recently with a plan to privatize Social Security, the Bush administration only worsens the problem. And there is a growing risk of a financial meltdown with the following elements:

First, as foreign confidence in the dollar keeps shrinking, so does the dollar. The Federal Reserve then has to raise interest rates defensively to make investments in U.S. securities more attractive to foreigners.

But high interest rates slow U.S. economic growth, hurt the stock market, and could contribute to a long-anticipated crash of housing prices.
House Sales

And that was written before today's news that "U.S. new home sales fell 12 percent in November."

To be sure, the Southeast was the only region in the nation that escaped November's decline. According to Bloomberg News home sales "declined 39.4 percent in the Midwest ... 28 percent in the West... and 7.1 percent in the Northeast." They rose 14 percent in the Southeast.

Overall, however, it looks like the nation saw the start of the biggest housing sales slump in more than a decade -- and it's not likely to stop any time soon. The prospect of "steadily rising rates has already begun to chill the housing sector," as Bloomberg quotes economist Anthony Chan saying.

Today's 'chilly' news should be a wake up call to the high-spending, tax-cutting Bush administration and Republican Congress. The nation can't long prosper by continuing to borrow from our own children's future -- or our increasingly "nervous" competitors in Asia.

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