Since the turn to the 21st century the factors that once supported dollar dominance have increasingly come under challenge. The mania of the New Economy has ended. The U.S. economy still registers high growth rates due to unrelenting consumption spending, but regarding its productive capacity, it is in a precarious state, as it is indicated by the persistence of high trade deficits. The military power of the United States in its present form is largely inefficient with respect to the relation between financial costs and political outcome. Finally, and probably most important, the dollar no longer holds the monopoly of being the only available international reserve currency. [Full Article]
Source link: http://archive.mises.org/3277/why-the-dollar-is-falling/
Why the Dollar is Falling
Previous post: Bork: Put Back the Berlin Wall
Next post: Graduate School in Economics
{ 21 comments }
You forgot the biggest reason for the fall of the dollar. In 2001 the money supply was about $4,750 billion. Now it is $6,625 billion. An increase of about 2 trillion dollars. http://www.research.stlouisfed.org/fred2/series/WMZMNS/30
Guess what the law of supply and demand dictates. That’s right, that the value of the dollar vs. other currencies that haven’t increased that much will fall. The U.S. government has effectively devalued our currency without telling anyone. It is a strength of the American economy that we can devalue our currency like this without severe economic dislocations.
As to the fall in prices in asset properties I am not convinced. If anything the increase in the money supply will result in the increase in price of asset properties.
One may argue of the causes but the conclusion is clear, the value of the dollar is in a long-term decline. What I do not understand is how this decline effects different asset classes? As an investor of US dollars, is there an opportunity to profit from this decline?
Long way of writing that Americans want foreign goods more than they want dollars.
I am pretty sure that GWB started to fight Irak – or rather Saddam Hussein – because Saddam wanted Euros for Iraki Oil…
As an investor of US dollars, is there an opportunity to profit from this decline?
Yes, invest in commodities or commodity stocks, such as gold, silver, and oil. Everything else – non-commodity stocks, houses, currencies – are a ticking time bomb. They’re built on credit expansion, and when the bubble pops, commodity owners will be the big winners.
We’re on a Road to Nowhere
The military power of the United States in its present form is largely inefficient with respect to the relation between financial costs and political outcome.
Wow, I’d like to see that calculus!
Siegfried Haberl: “I am pretty sure that GWB started to fight Irak – or rather Saddam Hussein – because Saddam wanted Euros for Iraki Oil… ”
And the real reason why Iran is the next target:
http://www.globalresearch.ca/articles/CLA410A.html
Agree that the latest wars are about oil (and gas and narcotics). The Talaban had the opium virtually eliminated. Our owners wanted a gas pipe line across Afganistan. Three monts after the war, the piple line contract was signed and opium production is running at 110% of pre war output. We only “free” oppressed people who have assets our owners want to control. To bad for Somalia. They are black people with no assets and our owners don’t care to “free” them.
I don’t know guys. If you plot the value of the old EMU, the Euro is currently very close to the average of the EMU as far back as 1980. We had two unusual periods in which the dollar appreciated sharply, then declined just as sharply. The first in the mid 80s, then immediately after the launch of the Euro. It seems to me that rather than collapsing, the dollar is just returning to the normal trading range of $1.20 to $1.40. Net FDI has a strong impact on the value of the dollar. Fed stats show an increase in FDI coming from Europe which means an appreciation of the dollar this summer.
Ballooning the dollar supply has reiterated the necessity for each dollar to be backed by something tangible. Unfortunately, the only thing backing the dollar is military technology and posturing. It is similar to loaning your neighbor twenty dollars and having him secure the note with a case of empty beer bottles, which he bought full and drank with your money. There is no invention or innovation in our culture, and with a declining intellectual base, we have become the salesmen of borrowed goods.
I’m a big fan of the Icelandic Kronur, take a look & see dramatic and thoughtful growth. Research the culture and how they do business. Astonishing.
As the Euro becomes more and more accepted as a reserve currency, this limits any upward movement of the $, i.e. we have not reached status quo…$ shall most likely decline further.
Pray, that Tokyo is not visited by a catastrophic EARTHQUAKE! A major divesting of $ holdings (rebuilding) to follow…?
‘Blah’ recommends investing in gold (or similar). But why not the Euro? I have been told of EverBank, but am afraid to put money in some fly-by-night Internet bank (well, it might have good reputation, who knows). I am willing to invest in gold temporarily, but gold does not earn interest. And at what point does one decide, ok there is not going to be a crash, or the value has reached bottom, time to put money back into interest-earning something?
Not that I’m an expert, but I’d say that the Euro is an ok investment for now–just remember that it too will be desirable only for a while before its value crashes to zero.
Gold/Silver will never lose that much value. That’s what Blah was getting at (I think).
I agree with the previous poster whose perspective of the dollar is a long term one and maintains that the dollar is well within its normal historical trading range.
Also, Mr. Mueller forecasts that stock, bond, and real-estate prices must fall if the dollar resumes its decline; does this then mean that based on his reasoning it would NOT be possible to see these asset prices decline in the face of a major, sustained dollar rally?
Relativity is the underlying key to understanding the value of today’s dollar. In a global fiat currency system, no currency has any acutal (tangible) value. A Currencies “value” can only be described in comparative terms to other currencies, i.e. the value of the dollar is falling RELATIVE TO the value of the Euro (or any other currency). Therefore, in a global sense, the value of dollar denominated assets also rise and fall RELATIVE TO other currencies.
The problem is that fiscal restraint has left the planet. Absent fiscal restraint all fiat currencies will fail. Currency values then are a relative measure of the velocity of the downward spiral of competiting bankrupt nations. Blah recommends gold because of it’s inherent tangible value. Commodities also have inherent tangible value. Investing in the Euro or the Kronur, or any other currency simply means that one is betting that the velocity of any given currency’s downward sprial is slower than the dollar’s.
Gold is great, as others mentioned, because you are not buying someone else’s debt. They’re inflating the supply of euros even faster than the supply of dollars, so when the effects are finally revealed to the population (the bubble that was created by inflating the money supply finally pops), gold and other commodities will be the safe haven.
Silver might be an even better investment, because central banks can’t slow a silver price hike the same way they can slow down a gold price hike. In the 1970′s, gold went up about 2000% and silver went up about 3000%. My advice is to put your money on these commodities, and sell after the bubble pops. Then ride the next bubble up…unless they finally abolish the Federal Reserve after the next crash, but what are the chances of that?
Mr. Kott (and your various dvisors please note):
If convinced of a continuous decline in a currency, the proper way to profit from that decline is relatively simple: I’ll get to that last.
Buying foreign currencies, precious metals, or commodities are by no means sure-fire ways to profit from continuing currency decline. All of these investments have dynamics and peculiarities of their own. When originally issued, the Euro was valued at $1.18 Over a span of time, in fits and starts but in relatively steady manner, it declined to about 88 cents–a drop of 25%. There’s no guarantee whatever that it won’t fall again. Gold and silver are both better bets than the Euro, in my opinion but, of the two, gold is by far the more certain simply because it retains more of its monetary relationship thn the more common metal. But there’s many a slip ‘twixt cup and lip. When betting that a currency is going to become worth less in the future, one who wishes to profit from that movement may very well wind up a loser–no matter which of the recommended investment vehicles had been chosen. Life’s like that. Just remember the famous bet that Sagan made (and lost) on the basket of 10 commodities: 9 were lower in price after the passage of time (and so might they be again). Many of the people who read Harry Browne’s original
“HOW TO PROFIT FROM THE COMING DEVALUATION” ended up losing money–it was too late by the time they read the book and they bought near the top.
I don’t say you shouldn’t invest in some or all of these things. But the surest way to profit from a decline in the value of a currency is to borrow as much of the stuff as you can with which to buy other, more desireable stuff: your profit is derived from the greater ease in obtaining money needed for repayment in the future. Real estate has been the vehicle of choice for the purpose simply because it is easier for most to borrow for that purpose. And, although the present prices may be a “bubble,” it’s an inflation-induced bubble that will continue in some fashion as long as the inflationary cause continues.
Historically, the “exchange rate” between silver and gold has been about 15:1. Currently, it’s closer to 60:1. Some people think silver is a better long term bet because they expect this gap to close back up closer to the historical figure. Myself, I prefer gold, though.
Peter:
Ratios are seductive, I grant. But which is the one to which to refer? First, there’s the ratio that exists in the earth’s crust. Then, there’s the ratio that prevailed in antiquity, another that prevailed before the big discoveries in western US, the one that was established by the US as a subsidy for the silver-producing states, etc. But the one you’re after is tomorrow’s–and unless you know a way to get tomorrow’s news in advance, none of that older data will serve. And, if you CAN get tomorrow’s news in advance, horse races and football games are quicker payoffs.
For many years of the relatively recent past, the principal use of silver was not for monetary purposes but for photographic emulsions. For all practical purposes, silver has undergone almost complete demonetization (thus lessening one major demand–and price–support); more recently, digital photography has (and continues to) caused reduction in demand from that area.
If you’re looking to protect purchasing power, I’d stick with gold; added to that, the potential up-spike in gold should even partial remonetization occur, is enormous (added to which is the greater likelihood of that metal being the one –if either–to be so treated).
anyone who thinks that the currency of a bunch of highly socialist countries is better than the free market is a fool. So please don’t bet on the euro.
dear sir, it is apparent now that the euro is linked to crude oil, and this accounts for the rise in gold, silver, and the huge bull market in commodities that is only just beginning. opec has done a masterful job of hedging out of the $ using the €. it is a little like the virtuelle € that existed before the cash € came into play, but it is there. this will cause extreme falls in the dow, starting now. the war on terror is a masque for a $ devaluation that is out of control. it is a little bit akin to the sleight of hand of the fed: raise interest rates, while devaluing the $.the $ will crash, as the petro$ is over. robert
Comments on this entry are closed.