The euro is down big lately, which is to be expected. Over-indebted countries have traditionally used devaluation to keep their debts from crippling them.
The problem is that a cheaper currency is only a temporary fix because it invites retaliation from everyone else. For a real-world example of this process in action, consider what just happened to McDonald’s. For the past few years it has been turning crappy food into great numbers, in part by adding new restaurants in hospitable markets and in part because the dollar was relatively weak, which made the euros and yen McDonald’s earned relatively valuable.
But with the euro plunging against the dollar, these trends have shifted into reverse:
(Reuters) – McDonald’s Corp reported lower-than-expected quarterly profit on Monday, hurt by a slowing global economy and the impact of a stronger dollar, and said sales growth at established restaurants would slow this month.
Results from the world’s biggest hamburger chain showed that even the most resilient restaurant operators were being hurt by the weak U.S. economic recovery and persistent financial woes in Europe — which are forcing diners to pull back on spending for meals away from home.
Shares in McDonald’s, which hit all-time highs of over $100 earlier this year, fell 3 percent to $88.83 in midday trading on the New York Stock Exchange.
Net income fell 4.5 percent to $1.35 billion, or $1.32 per share. The impact of the stronger dollar — which lessens the value of sales overseas for U.S. companies — cut 7 cents a share from earnings in the latest quarter, the company said.
Now extend this strong dollar/weak earnings narrative to Boeing, Monsanto, Cisco, and most other US multinationals, and suddenly the stock market, tax revenues, year-end bonuses, incumbent political prospects and everything else that makes life worth living for US elites start to look shaky. This is clearly unacceptable and will require a response. The dollar will have to go back down, and soon.
This will be accomplished with some combination of even lower interest rates, election year tax cuts, publicly-announced asset purchases or secret loans to favored banks, corporations, and political action committees. And it will probably work, lowering the dollar and raising the foreign exchange earnings of McDonald’s, et al.
But by then the Japanese and Chinese will be in full retaliation mode, which will beget even more ease from Europe. And so it will go until ending the currency war by returning to sound money becomes the least destructive option.