This is a story about a crate of cherries and a gallon of gas. Ken Bailey is looking forward to cherry season. A fourth-generation farmer in The Dalles, he'll ship about 50% of his Bing and Rainier cherries to customers overseas in places such as London and Tokyo.

"We're seeing larger orders in Europe and Japan," Bailey says. "There's more interest and less dickering on price."

The reason? A weak dollar. Thanks to the declining value of the U.S. currency, and the corresponding increased value of the yen and euro, boxes of Bailey's Orchard View Farms premium Oregon cherries are a bargain on overseas grocery shelves.

Meanwhile, every time Bailey fills up one of his John Deere tractors, he feels the pinch of gas prices that are inching toward record highs — prices pushed in part by that same weak dollar. Oil's price spike will add up to higher transportation costs, which in turn may trim Orchard View's profit margin.

While there are signs that Oregon's economy is improving — employment is up and corporate growth looks strong — macroeconomic storm clouds are gathering that could put a damper on our economic recovery.

The U.S. dollar continues to lose value against the euro and the yen; the U.S. trade deficit climbed to a record $617 billion in 2004; and despite the White House's insistence that the president is working to reduce the federal deficit, the country's books are still $427 billion in the red.

What does all this have to do with growing demand for Oregon cherries and the high price of filling up at the pump? A brief economic tour is in order.

A PAIR OF DEFICITS and a slumping dollar don't exist independent of one another. The three are intimately related and can be traced to one simple fact.

"We're spending more money than we earn," says Ron Davies, economics professor at the University of Oregon. While the situation inevitably leads to debt, most of us agree that there's good and bad debt. "Are we buying a house and investing in education, or are we blowing it on the horse track and living high on the hog?" Davies asks.

The answer depends on whom you ask.

When the trade deficit — resulting from the United States importing more than it exports — blew past the $600 billion mark last year, the Bush administration pointed out that the deficit wouldn't even be there if Americans couldn't afford all the imports they were buying. The trade deficit, the administration argues, is actually a sign of a strong economy, one that can produce the disposable income to buy imported electronics goods, cars and clothing.

"The Bush administration is not completely wrong," says Leopoldo Rodriguez, economics professor at Portland State University. "There's a lot of wealth available in the system."

But when you buy more from other countries than they buy from you in return, you can only keep it up by importing capital from abroad. A large and growing chunk of the trade deficit is with China, which in turn buys U.S. Treasury bonds. Because the Chinese yuan is pegged to the U.S. dollar, it's in China's interest to keep buying dollar-based assets to keep the value of the dollar from falling too low.

"China is keeping the game going," says Rodriquez. "And the United States is becoming more dependent on China."

By most accounts, the tight relationship with China isn't flat-out irrational. China's currency reserves are deep and its economy is bulky enough to take a few hits without wilting.

But it's the concentration of the deficit that worries Philip Romero, economist at the U. of O.'s Charles H. Lundquist College of Business and one-time chief economist to California Gov. Pete Wilson. Romero notes that just two Asian economies — China and Japan — account for nearly half of foreign U.S. Treasury holdings. "The more concentrated the phenomenon is, the more quickly it can change," Romero says. "Capital is mobile. It can run out much faster than it came in."

If something were to happen to make investments in the United States unattractive to China and Japan — say, an oil embargo wreaking havoc on our economy — demand for the dollar would drop dramatically and inflation and interest rates in this country would take off. Real estate prices would probably plummet and those stalwart U.S. consumers, the ones who've kept the economy going in Oregon and the rest of the country, would falter in the face of rising prices.

A more benign scenario would have Chinese and Japanese own domestic investments becoming gradually more attractive — and the key word here is gradually — slowing their pace of investment in dollar-based assets and weaning the U.S. economy from its dependence on imported capital from Asia.

Like the trade deficit, the federal deficit essentially exists because other countries are willing to lend to us — or, rather, to our government. As long as that stays true, and our assets remain attractive investments, the deficit is sustainable.

But in late February, the dollar took a tumble in currency markets on news that South Korea was planning to diversify its reserves out of U.S. assets. The news fueled speculation that other countries would follow suit.

How does all this affect Oregon cherry farmers? The fruit beginning to form on the trees this spring keeps growing more valuable as an export. And farmers who were griping about declining overseas sales and low-priced foreign competition when the U.S. dollar was strong in the late '90s are now awash in orders. But gassing up the truck? That's another matter. Spring gas prices in Oregon are inching toward the record highs set last year, and AAA Oregon predicts that unless prices stabilize, we'll see new records set in time for the summer driving season.

STILL, THE FUTURE ISN'T GRIM, says Randall Pozdena, managing director of economic consulting company ECONorthwest of Portland. If countries pull out of U.S. investments, he asks, where will they go?

Europe wouldn't provide a good return on investment, Pozdena says. "Euroland grew 1% last year. Great Britain and the United States are the only [Western economies] showing marginal growth and they both slashed social programs and cut tax rates."

Pozdena agrees with the Bush Administration's theory that making income tax cuts permanent will further stimulate the U.S. economy and eventually extinguish both deficits. And he strongly defends running up the U.S. budget deficit to pay for homeland security and the war on terrorism, asking, "Do we want our children living in fear?"

PSU's Rodriguez, however, suggests that President Bush has undermined the country's credibility — and international faith in the dollar — by pursuing the war in Iraq and letting the deficit mount. As Rodriguez sees it, the rising deficit is a calculated move. "The Bush administration has cut taxes to create a huge deficit in order to have the rationale to cut expenses," Rodriguez says.

IN OREGON, THE EFFECTS of the weak dollar are starting to be felt by consumers who are paying more for imports, such as cheese from France, televisions from Japan, oil from Saudi Arabia — the list goes on.

But for Oregon companies that export, the low exchange rate represents an opportunity to lure new customers with relatively cheaper goods.

Oregon farmers are better able to compete on price with overseas producers, leading to rising orders for everything from Eastern Oregon grains to Willamette Valley row crops and Columbia Gorge orchard fruits. One of Medford Fabrication's largest customers, an equipment manufacturer in Japan, is relying heavily on the Southern Oregon company because it can provide parts cheaper than suppliers in countries with stronger currencies.

Joshua Daniels, international sales director for Custom Craftworks in Eugene, says his European sales agents are happy to see a cheaper price on the company's massage tables and spa supplies. But, he says, they're also asking questions. "Some of them exclusively sell our products and they wonder how the direction of the American economy will affect us as a company," Daniels says. "They wonder about American monetary policy."

Some argue that the weak dollar will actually help the trade deficit in the long run, by boosting the flow of goods that we export. The problem is that the trade deficit is so wide already that exports need to grow by a much larger margin just to keep the deficit from growing. In January, exports grew by 0.9%, but imports grew by 1.9%.

The bottom line is that, as a nation, we're neither producing enough nor saving enough. It's a situation that most economists agree can't be sustained in the long run. The deficits and their drag on the dollar will have to be cleaned up. Just how that happens — gradually or painfully, prompted by benign factors or precipitated by catastrophe — will make all the difference.

Ken Bailey, for one, isn't worried about his cherry business. The economy has always been a cyclical thing, he figures. High oil prices aren't going to take much profit from him this year and using the weak dollar to his advantage is just a smart business move. But if inflation hits, his cherries may just price themselves back out of the market. And then today's steep gas prices would start to look like a bargain.

Have a story about how these global economic trends are affecting your business? Send your thoughts to feedback@oregonbusiness.com.

Copyright 2005 Oregon Business magazine