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Besides, the weak dollar is a big factor in the revived manufacturing sector. After some lean years, exports are picking up, and factory profits are on a roll. In the third quarter alone, equipment maker Caterpillar attributed $102 million of sales largely to the benefits of a falling dollar. General Motors is opening new Cadillac dealerships in Europe. "The drop in the value of the dollar certainly helps," says James Taylor, Cadillac manager in Detroit. Other U.S. multinationals are reaping windfalls too, converting overseas revenues into the weak dollar and getting more of them.
That is all good stuff, for now. But over the long haul, a banana-republic dollar could lead to inflation, higher interest rates and a recession likely to spill around the planet. In the past, the strong dollar allowed the U.S. government to borrow cheaply and attract investment in the safest currency on the globe. That helped finance the budget deficit, kept interest rates low and also allowed Americans, as individuals and collectively through their government, to spend way beyond their means. Foreigners are big buyers of mortgage securities, which make purchasing that McMansion more affordable. They hold nearly $2 trillion of Treasury securities, keeping government costs low enough to allow the President to consider his new initiatives. But foreigners may be reaching their saturation point when it comes to funding the U.S.'s profligate lifestyle. The nation sucks up 80% of the world's available savings. If the dollar loses its cachet, foreigners will demand higher interest rates, which, if they rise fast or far enough, could topple the economy.
EUROPEAN PAIN
Americans traveling in Europe, where their dollars don't go very far, are feeling some pain. While vacationing in Paris last week, university professor Maria Armanda was surprised to find "a bottle of Coca-Cola outside the bus stop was $2.60. That's unheard of! I needed the caffeine, or I wouldn't have bought it." Trina Chang, a Californian backpacking through Europe, says, "We were going to buy two oranges this morning, but they cost so much, we put them back. It's so expensive, it's so sad." More important, the cost of foreign goods in the U.S. is increasing. Consider: at import-foods shop A Southern Season in Chapel Hill, N.C., a pound of European Brie has shot from $6.99 to $8.29 in a year, and even at that price, the store makes less profit. "We try to educate our staff" about the dollar impact so they can explain the prices to angry customers, says manager Briggs Wesche. And it's not just cheese and other luxury imports: every American buys foreign goods, from TVs to food to clothes--often without knowing it--and many of those things will cost more too.