Skip to comments.Dump Your Dollars NOW!
Posted on 11/28/2004 10:45:30 PM PST by CHARLITE
Have you checked the value of your stocks or your real estate lately? In euros? Or British pounds? Has it all sadly disappeared seemingly while you were sleeping?
Looking at the dire prognostications of currency analysts on television or in the newspapers lately would lead one to believe that all of your assets are evaporating like raindrops on a Phoenix sidewalk in August. Given the depth of the dread, Im surprised that some of the Wall Street brokerage firms havent taken advantage of all this gloom by selling a currency-hedging strategy to consumers that would prevent the disappearance of home equity as a result of the declining dollar. Hmmm.
Want to hear the truth? Well, as measured by a basket of currencies all combined into one index for futures that change hands on the New York Board of Trade, the dollar is actually at the same level that it was in 1995. Did the end of the world occur in 1996 and I slept through it?
As usual, the media are confusing Americans by focusing too much attention on excessively negative minutia while ignoring the much larger, global perspective. Yes, the dollar is indeed at all-time lows against the euro, but as the euro didnt exist in 1995 at the dollars last low, we dont specifically know what it might have been worth back then without extrapolating. Absent such a calculation, as the dollar was weaker against most currencies in 1995 than it was in 1999 when the euro was first introduced at $1.18, it is safe to assume that it would have been worth more than that if it had existed in 1995, and potentially even more than its current $1.32. As a result, todays exchange rate is by no means a cataclysmic valuation. Feel better?
Something else to assuage your fears with regard to currencies is the possibility that as our stock market was experiencing its bubble phase in the 90s, so was the dollar. If one were to take a look at an S&P 500 chart, you would notice that as our stock market rallied from 1996 through 2000, it did so practically in tandem with the upward move in our dollar. Why? Well, as stocks were appreciating, foreigners were buying them, and, to do so, they first had to buy our dollar. As such, one could make the case that the dollar was just as overvalued in 2000 as stocks were.
Of course, the dollar didnt immediately collapse with stock prices in 2000 mainly because moneys seemed to initially just transfer out of equities and into U.S. Treasury securities keeping the dollar strong through 2001. However, when our economy didnt begin to truly expand in 2002 as many had expected, a bear market in dollars started that hasnt ended yet. Likely, this was also precipitated by continued Fed easing that exacerbated the differences between American interest rates and those across the globe. As a result, it is quite likely that until our interest rates head significantly higher, our currency will probably remain very soft.
Lets look at this more precisely against one high-profile currency just to understand how much interest rates might be at the heart of the problem. Before our recession began in 2001, the Federal Funds rate--the rate the Fed charges for overnight loans to American banks--was 6.5%. By contrast, the corresponding rate offered by the Bank of England was 6.0%. As a result, at that time, an investor could have received a half a percentage point more in interest in America than in Great Britain. However, as our economies declined, and our central banks lowered interest rates to try to spur growth, our funds rate dropped to 1%, while Englands declined only to 3.50%.
What this means is that our bonds and bank savings rates went from paying more than those of Englands in the year 2000 to 2.5% less by 2003. Obviously, this represents a huge motivation for international investors to move money out of America into Great Britain. In doing so, they first had to convert dollars into pounds. Now, consider all of the banks, mutual funds, and pension funds all around the world that wanted to get that higher rate, and you can imagine that a lot of dollars have been exchanged for British pounds in the past three years. Unfortunately, this problem still exists today, for as we have raised our rates to 2%, the Bank of England actually has now widened this gap, as they are currently paying 4.75%. Make sense?
Taking this a step further, in China the interest rate differential is even greater, as the country's central banks key lending rate is currently 5.58%--a full 3.5% higher than ours--thereby enticing money flows into that country. This brings up another issue that the press seems to not want to discuss that is likely exacerbating the dollar weakness across the globe; the Chinese currency, the yuan, does not float. It is instead pegged to an exchange rate against our dollar first established in 1994. This archaic and unfavorable ''peg'' exaggerates the decline that our dollar is having against the euro and most countries that trade with China. This is one of the reasons that U.S. trade representatives have been begging the Chinese government to allow the yuan to float like other currencies. It is widely speculated that such a move would not only act to reduce our current trade deficit with China by increasing the relative cost of China's products versus ours, but might act to abate some of the current upside pressures on other currencies against the dollar.
Of course, this begs the question: Is a weak dollar a bad thing for our economy or our nation? In reality, the answer is NO. One of the most hypocritical aspects of the current carping about todays dollar weakness is that in the same breath, people are complaining about our trade deficit and how large it is. Well, whats the best solution for our trade deficit? A weak dollar. Why? Because a weaker dollar makes our products cheaper around the world, and foreign products more expensive here. As a result, the weaker our dollar gets, the more goods and services we will sell overseas (hence, increasing exports), and the less foreign products Americans will purchase (hence, decreasing imports). Barring the implementation of trade quotas or tariffs--which America as a free trade advocate should NEVER consider--the best way for us to deal with our growing trade deficit is through a soft dollar policy.
Another unbelievably hypocritical assertion being floated this week was that foreign central banks were going to stop purchasing our Treasury paper because of the declining dollar. Now, I must say that I have been hearing such prognostications for more than twenty years, and it has never come to fruition. In the 1980s, it was Japan and Germany that were going to stop buying our treasuries. Never happened. Last week, it was China. Of course, since China's currency is pegged to ours, the Chinese are forced to buy dollars as their money supply grows much like a central bank whose currency is tied to gold must keep gold on hand. Additionally, any country that is concerned with preserving its trade surplus with the United States would be cutting its own throat by allowing the dollar to further devalue. As such, this dollar boycott speculation is hogwash.
Furthermore, if central banks around the world were beginning to cut back on purchasing our Treasury bonds and notes, wouldnt we see a decline in the price of these debt instruments? Looking at a chart of the interest rate paid by a ten-year T-note, one will see that this percentage is virtually the same as it was when this most recent decline in our dollar began at the end of August thereby suggesting no serious reductions in demand for these investments.
So, why is the media focusing so much attention on our current dollar situation, and doing so in a way that suggests a dire condition? Well, in response to Mr. Bushs huge victory at the polls, the left and the press who supports them have now changed their modus operandi from defeating him to blocking his pending legislative proposals--Social Security reform and tax simplification.
To be sure, nothing offends the left more than tax cuts and the possibility of American employees actually being able to direct their own Social Security contributions. Given this, much as the leftists and the mainstream media for the past 24 months depicted all economic news in as negative a fashion as possible to try to persuade voters to support Senator Kerry, their goal now is to thwart the presidents agenda by suggesting that his initiatives will have dire economic consequences. A NY Times article asserting that Bushs Social Security plan will dramatically expand the federal deficit should give you an idea of what they have in store for us.
How is this at all related to the dollar decline? Well, although our federal deficit is certainly a component of the dollars decrease in value, it would be naïve to suggest that this is the sole precipitant. However, I fervently avow that in the coming months, we will continue to be barraged with such deficit-to-dollar proclamations. The purpose? To scare the population into believing that not only is a soft dollar a terrible thing for them, but that the presidents Social Security and/or tax simplification proposals will further exacerbate the deficits which, in turn, will yield continued dollar declines thereby hurting the American economy and its citizens personally.
About the Writer: Noel Sheppard is a business owner, economist, and writer residing in Northern California. Noel receives e-mail at email@example.com
Dump 'em in my wallet.
NO!! send them to me
Sorry you're too late.
What a joke, this guy is totally clueles.
I can always count on you, my friend, to hit the nail on the head with biting sarcasm.
It's pretty much a fait-accomplit that the USD will continue to drop in value in comparison to commodities, especially gold. As the Chinese being to decouple the USD from the Yuan, this process should accelerate.
However, the USD's valuation in relation to other currencies such as the CAD and Euro may not decrease as rapidly, as other economies attempt to manipulate their respective fiat currencies.
No. He's right on.
That advice MIGHT make a small modicum of sense IF you are a currency trader or do alot of international travel/business.
A weak dollar is only critical when you MUST buy imported items. There is nothing we NEED which MUST be bought overseas.
OK, I hear the snide out there saying "Oh yeah? What about OIL, smart@ss!"
We have plenty of untapped oil here in the USA. The reason we buy it overseas is that it is cheaper to buy it there and ship it here than it is to pump it up from our own soil. That is due to union and environmental blackmailers that jack up the costs.
When the dollar falls far enough, it will be once again cheaper to drill/pump it here, with a corresponding rise in employment and the general economy.
I'm pretty much ignorant when it comes to global economics. What Sheppard said seemed to make sense to me, but now you made me think maybe I'm missing something. Could you fill me in on why you think he's clueless?
LOL. A man after my own heart!
Translation: When the banks give it away it loses its value...
I have been thru this to many times on too many threads and it is getting late. Go read any of the many other threads on the dollar or older threads on trade policy. Sorry don't meant to be crude, just tired.
LOL!...yeah...whatta dip shiite!...yeah...send 'em to me!....LOL
Never come backs!
1:Economy 2:stock market 3:oil prices 4:jobs 5:Dollar
When will the doomsday people ever learn. This is America
we always come back.
You are so exactly correctomundo!!!
Well, on missing the point I certainly have to agree. I held my nose while reading and if the debate is framed right, his economics are correct. But what we need is less economicspeak babble injected into to the debate of healing our national fiscal problems. I just had the drift you and others read the title and failed to read the whole article.
Sure it makes common sense. our goods are cheaper therefore we will sell more, but common sense is what tells you the world is flat. It does not always work out that way.
Lowering your prices does not ALWAYS create demand. Most of our trading partners have barriers to our goods, long inspections, tariffs, content laws none of that is going to change and if the US goods start to take market share, say in China, then China will erect new barriers to protect it's market.
See, and that is just one of many falsehoods in this article. I will hand for a few to deal with flamers.
I lived in Louisiana in the late 70's and early 80's.
I clearly remember the State economy falling apart due to their dependence on tax revenue from the oil & gas industry.
Confiscatory taxation, outrageous wages for unionized employees, and huge expenses caused by environmental regulations and eco-wacko lawsuits is what killed domestic petroleum production; not lack of domestic supplies.
Thanks for the reply.
The ONLY way to open markets is by CLOSING your market and then sitting down and working out some kind of a deal. But the "grown ups" in DC don't get it, even starring eyeball to eyeball with a trillion dollar deficit they still don't get it and they never will. They are the talaban of free trade and they are taking us all on a suicide mission.
I always always look to see where something is made. We are still the largest manufacturing country in the world. Look and find the US stuff. its always higher quality. 3 things we make better than anyone -guitars,tools and aircraft.
Why does everyone worry so much about the falling dollar? Doesnt this make our products overseas cheaper and there products more expensive? Wouldnt this help our econ?
And if THAT wasn't enough, now they are changing it yet again. Only this time, it is starting to look more Canadian..
One thing. The new $20.00 is GREEN. Remember Monopoly Money? The $20s were green, too.
But because the Treasury didn't pay attention, the new $50.00 bills aren't blue.
THEY SHOULD BE BLUE. But they're not....
And now, the dollar is weak. Why? They made the $50.00 PINK.
Um, the $5.00 bills in Monopoly were pink.
THIS EXPLAINS IT ALL.
Sooner or later, all your bills will be worth 1/10 of their alleged value..
Our markets are open to the world because we are smart enough to know that when you erect trade barriers you're shooting yourself in the foot.
Take steel for example, when Bush put up tariffs on foreign steel he protected the domestic steel industry sure, but he also screwed over every other company in the US that uses steel to make its products.
He also screwed over all the consumers who buy anything that is made with steel.
yea, that is the downside of protecting your market, you pay more until your domestic production is a good as foriegn production. Some time due to circumstance beyond your control you can never match the imports. Oh Well. Ain't no prefect man made system yet.
Wait for the Euro to fall? What is worth importing from Europe? Wait for the Euro to completley fail... I think that is what you were looking for.
Get ready for hyperinflation especially after the Fed starts monetizing our debt to prevent a collapse which will only accelerate the process.
We are going the way of Argentina.
The good news is that real estate will get real cheap and the smart money will have the capital to take advantage but will be excoriated in the MSM.
They don't quite grasp that concept. And thank goodness for it. When the market is down I buy more, when the market is up I buy a little less.
These people who buy high and sell low are providing me with a nice nest egg.
The pretentious auto Peugeot becomes very expensive for Americans buyers of French goods...
Hehehehehehehehehehehehe......this is just too good.... I imagine President Bush is losing sleep over the plight of Peugeot....and other goods from France.
From everything I have read, the EU does not appear to be stable. No, we are not buying stuff there, who would want to? Because the Euro is new, it has a "wow, new stuff" value. Because it represents several countries, the misperception is that it is strong.
The Euro dilutes the currency market far more than the currencies it replaced.
That being said, I do not see the EU as a stable organization. It appears to be led by the most corrupt groups, bound to implode. Obviously the USD is taking a hit for the UN OFF scandal. It's only temporary, as always.
As for Japan, we just gotta work on our competetiveness. We have some of the best and brightest in every industry, I do not understand why we do not use that to produce higher quality stuff without labor issues.
I cannot see the implications of Putin in this picture yet, but he's a'comin'.
Very true, and very sad.
"Keep money in cash, gold, real estate, stock market?"
have to have at least 6 months of cash on hand.
any where from 10% to 25% gold. low end numi is my suggestion.
land if its a fixed rate.
a little stock for your excitement.
My post is gone...
Weak dollar = trade = strong country
The country does not die with the dollar.
Provisions are alreaddy in place for allternate currency.
paper gold without accounting is just another fiat.
hmmm wonder why the first post was removed?
no profanity,no racism, no violence,no personal attacks...