Will Dollar Decline Continue?
Sunday June 21, 2009
(Credit: Getty Images)
Unfortunately for those readers, it will. The Treasury must sell more notes to finance the Economic Stimulus Package. The U.S. debt has risen to $11.4 trillion, which is concerning China and other investors in Treasuries. Finally, the Fed Funds rate is at zero, making the return on the dollar lower than other currencies. These pressures will continue to drive the dollar down.
The dollar had been on a downward trend before last year's credit crisis, which actually strengthened the dollar as investors sought a safe haven. However, now that there is an increase in liquidity, companies no longer have to hoard cash as they did in 2008.
What It Means to You
A weaker dollar means more expensive vacations in Europe or higher living expenses for those overseas. It will also translate into inflation, as it raises the cost of imports. Oil prices will continue to rise, since these contracts are priced in dollars. especially oil. The only good news is cheaper exports, which could help U.S. economic growth.Share how the dollar's value affects you.
Comments
We are so accustomed to the fluctuations of values of currencies that we fail to acknowledge the absurdity of our situation. The value of what I earn today should not change, relative to what others earn around the world, because of the actions of anonymous foreign exchange traders.
Instead, we should have and should demand a Single Global Currency which will be stable and will not fluctuate in value relative to other currencies – because there will be no other currencies by definition. The key to the stability of value of that Single Global Currency will be the management of inflation at some level less than 2%, or even 1% per year. The primary goal of the Global Central Bank must be stable money, leaving governments and the private sector to manage their economies.
Until we implement a Single Global Currency, the values of currencies will fluctuate and the only way to protect against such fluctuations is to diversify one’s savings and investments into assets in several currencies.
See http://www.singleglobalcurrency.org.
Hi Morrison,
A reader in the forum raised an interesting question – What would happen to the value of the dollar if someone (China?) started to implement a single global currency?
For more, see Global Currency Forum.
Kimberly
Morrison Bonpasse is close; however, a stable currency that has any inflation is a contradiction. The value of any stable currency does not change at all. Gold standard really is the best. For example, for every dollar in circulation, there is 1 ounce of gold in the treasury to back that dollar. Every quarter coin represents 1/4 of 1 ounce of gold. If you want to increase the money supply then you need to increase the gold that backs it respectively.
Hi Nick,
I’m afraid that toothpaste is already out of the tube, and we can’t put it back in. Unfortunately, there is not enough gold in the world to back all the money that’s been created. For example,
For more, see Return to the Gold Standard?
Kimberly
Kim,
I agree that there is not enough gold to support the number of dollars that is already in the market. But we need to find a way to stop the incessant manipulation. The bubble was first started with a very loose monetary policy by the Fed (it was definitely not intentional but devastating in the end). This led to record money flow into the US market.
How do you force the Fed and Congress to respect the 60+% world dependence on the US dollar. A 1% change in the US dollars versus EURO or Yen or Pound Sterling leads to several hundred billion dollars worth of losses to one of the parties in a Forex contract. This is difficult to stomach for a smaller exporting country which is then forced to tie their currency to the US dollar which then leads to its local inflation tied to the US dollar movements.
Should the management of the currency and money printing be automated. Thus even if it is not tied to gold, it is not in Fed or Congress’ control?
Hi Madwesh,
I think that is why China, Russia, India and others are calling for a global currency. Russian President Medvedev even presented a world currency coin at the G-8 summit.
They are trying to pressure U.S. into considering their needs when setting fiscal policy.
Kimberly
Kimberly and Madwesh,
The transition to a Single Global Currency, or to a currency of a monetary union, which is seen as the likely future Global Monetary Union, is a sensitive matter.
When the U.S., or China, or Japan or U.K. or other major currency decides to join or create a monetary union, the public will need to be reassured that the future common currency will preserve the value of those oon-to-be legacy currencies. We have seen this process almost annually in the EMU, as Slovenia, Malta, Crete and Slovakia have joined the eurozone. At some point the valuation of the legacy currency in terms of the new currency is set, and the actual conversion is scheduled. On Day 1, the ATM’s and bank clerks will begin issuing the new currency.
A similar process occurred when El Salvador and Ecuador dollarized. Please note that when Ecuador defaulted this Spring on some of its foreign debt, it currency didn’t crash – because it’s the U.S. dollar.
Medvedev’s symbolic Single Global Currency coin is important. Slowly, the world is seeing the need to move not from one regional or national currency to another, but from one national currency to a Single Global Currency.
I agree with Nick that a truly “stable” Single Global Currency would have an inflation rate of zero, and that’s a good goal. Perhaps the currency “2% or less” goal of central banks is a function of the multi-currency system. With complete faith in one currency, rather than seeing one’s currency fluctuate in value from day to day, we may see an inflation goal and rate much closer to zero.
Morrison
I wonder if a good first step would be to combine the dollar and the euro. The two economies – U.S. and EU – are similar in size. Together, they make up almost half the world’s GDP.
To your point, Morrison, smaller countries are only too happy to tie their monetary wagon to the euro, despite some of the disadvantages to them.
Kimberly
It is my assessment that the world that operates on Fiat money (and not tied to any thing) needs at least two or three currencies. And also a market to freely operate the arbitrage between them allowing people to shift from one currency to the other seamlessly. This lack of mobility of assets across currencies is the real problem with the system today. Thus a better solution is a free market that efficiently reflects the arbitrage than one single currency.
In a single currency global economy, a perception of failure of the Fiat money or a shock to a global economy will drive trade back to gold as the trading currency – that is the only place to go for a pessimistic unwind. The resulting deflation of the Fiat money will be devastating.
Also, after the one single currency is in place, all the countries which have developed their economies based on pegged currencies, will take decades to restructure. Consider this – China will not be a manufacturing hub as their labor is no longer competitive (that is 1 Yuan = 1 Dollar). There will be a significant re-distribution of their present export dollars back primarily to the more nimble developed (yes you read it right – developed) countries.
Japanese auto industry will whither. If a 15% strengthning of the Yen has upset the cost side of their manufacturing leading to poor margins, just imagine what would happen if 1 Yen = 1 Dollar.
The arbitrage and the potential for arbitrage is a significant motivator for innovation and competition. That aspect of competition will go away which could disincentivize innovation.
Kimberly,
Yes! The merger of the euro and the dollar into a monetary union would create the ad hoc Single Global Currency, as it would support about 50% of the world’s GDP. Such a currency immediately would support 24 countries as 8 now use the dollar and 16 use the euro, and the remaining 11 European Union non-euro countries would soon join. The momentum toward a Single Global Currency would thus pass the 40-50% of GPD “tipping point” and be unstoppable. As long as that monetary union stuck to the primary goal of monetary stability, the other countries of the world would eagerly join. Why not join a monetary system that provides what the people of the world want?
Madwesh,
I don’t understand your point about the “lack of mobility of assets across currencies.” Every trading day (260 a year), $3.8 trillion is traded on the foreign exchange markets. Such capital flows, amidst fluctuating currency values and with annual transaction costs of about $400 billion, are enormously expensive and risky. With a Single Global Currency, these same capital flows would be non-events. There is no market now, or a need for arbitrage, for the currencies of Greece and Germany, or for California and New York, because they use the same currency.
To test your predictions of what would happen to the competitiveness or economies of countries after their joining an increasingly larger monetary union, culminating in a Global Monetary Union, please look at what happened to the European countries after they joined the EMU. Germany remains the major manufacturing and exporting country, for example. Italy’s cost of debt dropped due to lower interest rates. All the EMU countries can now focus on fiscal and regulatory mechanisms to improve their economies and leave the need for monetary stability to the European Central Bank.
I don’t see how the current opportunity for arbitrage among currencies is an argument for maintaining the multicurrency system or how it assists innovation. George Soros is one of the world’s experts in currency speculation, and he has argued since his 1987 book, “The Alchemy of Finance,” that the world needs a Single Global Currency, even though he earns enormous profits in speculating within the existing risky, inefficient and expensive multi-currency system.
Morrison
I think the point Madwesh is making is that China and Japan are using the value of their currency as a comparative advantage. For Japan, it worked great as long as the yen carry trade held.
Before switching to a global currency, these countries would need to build up other comparative advantages.
Kimberly