Few phrases seem more quaintly outmoded these days than “sound as a dollar.” Once the embodiment of American financial strength, the dollar has spent the past five years getting sand kicked in its face by the world’s currencies, and in recent weeks, thanks to the Federal Reserve’s surprisingly big interest-rate cut, its decline has accelerated. A euro, which you could buy for eighty-six cents in January, 2002, now costs $1.40, and the Canadian loonie, once an easy object of derision, is as valuable as a dollar. In 1922, Ernest Hemingway wrote an article explaining how to live in Paris on a thousand dollars a year. These days, an American in Paris is lucky to spend a thousand dollars a week.

CHRISTOPH NIEMANN

Most Americans, of course, don’t worry too much about the price of dinner at Taillevent. But the dollar’s latest drop, in the minds of many market observers, is bad news even for Americans who stay home. We are, after all, hooked on imported goods—in 2006, the U.S. paid $1.8 trillion for foreign imports—and a weaker dollar should, in theory, make them more expensive. But, despite the daily headlines, there’s little evidence that the situation has provoked anxiety. Indeed, some in Congress are trying to pressure China to revalue its currency upward, which would make the dollar even weaker.

How can Americans, with their love for foreign goods, remain indifferent to the dollar’s drop? Mainly because so far it has had surprisingly little impact on our standard of living. Inflation, for instance, has remained solidly under control—the economy’s core inflation rate was about two per cent over the past twelve months, and it hasn’t been much higher than that in recent years. Even more surprisingly, the prices of imported goods have gone up only slightly. If you travel abroad, you feel like a pauper. Yet if you stay at home you’d be hard-pressed to notice any difference from a decade ago, with the notable exception of the price of oil.

In part, this is because exchange rates move far more quickly than real-world prices, which tend to be what economists call “sticky.” It’s a hassle to print new menus or product catalogues, or to go back and re-tag every item in the store, and it also confuses and alienates customers. So companies tend not to change prices all that often. They also use futures markets to hedge against currency risk, which reduces the need for price increases. And China has played a huge role. Although the dollar’s value has plummeted against the euro, it has fallen much less against the Chinese yuan; that’s because the Chinese government continually buys dollars to prop up their value and insure that Americans can keep buying Chinese exports, which have been fundamental to China’s economic boom.

But what’s most interesting is that foreign companies have essentially chosen to protect U.S. consumers from the effects of the weak dollar. They have resisted increasing prices here, accepting lower profit margins in order to maintain their market share. The American market is too big and too important for them to run the risk of losing customers, and, because it’s so competitive, they generally can’t raise prices without losing market share. So high-end television sets, foreign beer, and luxury cars have all remained relatively affordable, even though the dollars we buy them with are worth much less than they were a few years ago. This is not an entirely new phenomenon: a Federal Reserve study published after the dollar’s crash in 1985-87 suggested that “foreign competitors relinquished profits for market share” by holding down price increases. That tendency is even stronger these days: a recent Federal Reserve study found that changes in the value of the dollar today have half the impact on American prices that they did during the eighties. It’s hardly surprising, then, that over the past three years the prices of imported goods have risen just a little more than two per cent on average annually.

As a result of all this, American consumers are living in a kind of cocoon, where the rules that apply everywhere else seem not to matter. This creates bizarre disjunctions; for example, foreign-made luxury cars are often cheaper to buy in the U.S. than in their home countries. Or consider Halo 3, Microsoft’s new Xbox 360 game. If you buy Halo 3 from Amazon.com, you’ll pay sixty bucks. If you buy it from Amazon.de, in Germany, you’ll pay ninety-three dollars. Adjusted for taxes, this means that German consumers are paying twenty-six per cent more than Americans for the very same product.

The virtues of this peculiar arrangement are obvious: Americans are able to buy far more stuff with their flimsy currency than one would expect. The vice, if there is one, may be that the relative painlessness of the dollar’s decline has made it easier to ignore the reasons for it, like our colossal government debt and the trillions of dollars we’re going to have to spend on Medicare and Social Security for retiring baby boomers. We know that these things matter, but it’s hard to get worried about them when foreign-made DVD players cost twenty-nine dollars. The danger is that if no changes are made, and the dollar continues to fall, the safety net may at some point get yanked away, with China refusing to prop up the dollar anymore and foreign companies finally forced to raise prices. As the chorus of voices lamenting the latest drop in the dollar suggest, it may well be time for Americans to emulate the ant. The problem is that the rest of the world keeps making it too easy for us to be the grasshopper. ♦