The US Dollar is in the dumps!

[Diego Mamani]

“I don’t care what happens as long as it produces 10% or better returns on CD’s.”

You’re kidding, right? If I put $1M in a 1-year CD paying 10%, I have $1.1M a year later, or only $1.06 once Uncle Sam taxes my interest income.

Problem is, in the high-inflation environment Ben Bernanke is concocting, the price of gold, oil, Euros, gasoline, new cars, etc., etc., may well increase by more than the 6.5% after-tax return that you get from your 10% CD.

What’s the point of having more dollars in 2008 if they’ll have less purchasing power than in 2007?

[Diego Mamani]

“Without value preservation, paper money is just paper and not money anymore”

Given the current easy-money policies of the Fed, our paper money will soon be worth less than used toilet paper.

What a crappy state of affairs!

[HereWeGo]

bsr-

If you listened to Bernanke’s response to Paul, if you read Mishkin’s latest speech, or if you heard Alice Rivlin today (I love XM in my car) you would realize that your claim is simply not true.

If the dollar devalues in a avalanche fashion (say, 1$ = 2+ Euros) maybe the Fed will care, but until that point, the Fed might very well see the currency devaluation as a market solution to the current trade imbalances … excepting the renminbi, I suppose. As long as domestic prices do not rise with import prices, the Fed probably won’t care.

[drunkle]

how will domestic price stability be possible? given a choice between exporting domestic product for a higher profit than selling at home…

domestic products…

food -> china
raw materials -> china
autos, sort of -> wrecking yard
reality shows -> trailer parks

and higher energy costs will push everything up anyway. so, unless the fed changes the cpi to only count reality shows…

[Borat]

They’re slowly gonna make the currency worth as little as they can without causing the foreigners to dump their treasury instruments en masse. If they can devalue by 50%, voila they owe 50% as much money as they used to. By hiding real inflation behind a bogus CPI value they keep interest rates low while running the presses 24/7 and deflating the value. It’s brilliant! Unless of course you have your money in dollars and then it sucks. But of course Americans have debt not dollars so it’s good for them!

[bsrsharma]

HereWeGo,

Borat has written a good explanation. FED WANTS controlled decent. That is the only way to balance the trade. But they have to be careful not to cause a panic and stall. It is like landing an airplane – you want to glide and not fall down. BB DID not create any of the crises the nation is in today; he can only attempt to fix the problems. They are all very mindful of exchange rates with the rest of the world, commodity prices etc., Knowing all that, they have to carefully lower the $ at about 6% p.a. max till trade is balanced and we no longer need huge capital imports for consumption. It may need 10 years or 20 years – but it has to be done.

[LostCat]

Seems like there are too many variables to make a clearn decision. Too many economic problems to find a solution. We’re obviously headed toward some type of economic crisis. How it hits each individual will depend on where your money is, right? Some seem like they will get a nice slap in the face, while others will lead this country back to global prominence.

Over all, how do you all think the presidential elections are going to change our economic outlook. Say if Obama or Hilary win? Its obvious that guy in the white house has something influence on the economy. What if we were poring the billions that we are poring into Iraq and Afghanistan into domestic infrastructure projects needs, such as: new boarders, mass transit, etc..

By the way, this star wars system that Bush is working on. Do any of you understand why we would build that when all countries like China and Russia have to do is develop a nuke the size of a peanut, sneak it in to each city and just keep it there. no body would be shooting anything anywhere. A star wars system is out dated and we all know that 9/11 opened up the gates to new ways of attacking us.

[HereWeGo]

Here is the commentary by Rivlin, FWIW. A pretty good discussion – it’s interesting that Kudlow is spooked enough by commodities and the dollar to suggest that the Fed should hold at 4 3/4.

[Eugene]

Mission of the Fed is to ensure orderly functioning of the economy. If gradual devaluation of the dollar is what it takes, than that’s what it takes. There are worse things in life than devaluation. If you had to choose between $2 euro and 25% unemployment, what would you prefer?

Devaluation of the dollar is an unfortunate necessity. Many serious economists (e.g. Paul Krugman) warned that we had it coming for a few years. Basically, the story is that our current state of affairs (large trade deficits financed by foreigners buying low yield dollar-denominated debt) results in artificially overpriced dollar and is not sustainable indefinitely. Trade deficits must close, that can happen either through gradual currency devaluation or through sudden dollar collapse (aka “Wile E. Coyote Moment” – google it).

kicksavedave: rates are spiking because foreign investors are coming to realize that investing in the dollar is risky and they are demanding higher interest rates to protect them against devaluation. Interest rates will increase (maybe substantially, to 10% or more) and they will only come back down when dollar is sufficiently devalued and balance of trade is restored. Rate increase may help in the short run but the real underlying problem is long-term and it seems that the genie is out of the bottle.

[kev374]

The dollar has already slipped against the Indian Rupee from 1USD = 46INR in January to 39INR right now, a 15% drop, and it’s still falling, all that outsourcing that seemed like a good idea will slowly become less attractive as costs rise.

I don’t see how devaluation of the dollar can help the economy,

Since we import most of our goods (and even services) from abroad, China, India, Mexico etc. the cost of those goods will escalate. If prices of goods go up consumption will decline.

[Eugene]

escalating the cost of these goods and reducing consumption is exactly the point. difference between american levels of consumption and production is what ultimately drives this devaluation.

[condogrrl]

If I don’t consume much, then how does the dollar losing value harm me? TVs, computers, clothes, rent, etc. are all cheaper than they were last year. Food may be up, but don’t most of us eat too much anyway? The answer to the devaluation of the dollar is to not be a big consumer. If CD interest rates were 10% believe me, I would be much farther ahead. I have control over what and how much I buy. That’s my response to inflation.

[kewp]

Food may be up, but don’t most of us eat too much anyway?

Exactly. America needs to go on a consumption diet. I have absolutely no problem with people being ‘forced’ to eat less and drive smaller cars.

The flipside of this is that a devaluing dollar discourages savings. Or, at least, keeping your savings in a US bank.

[bsrsharma]

eat too much

That is inconsequential. Our major deficits are;

1. Public debt (federal government)

2. High private debt for housing

3. Oil & Gas imports

4. Auto imports

5. Large corporate debts. Hidden corporate debts due to rising health care costs and commercial real estate costs.

6. Consumer Electronics etc.,

Food & clothing are relatively minor.

[HereWeGo]

Here’s a bit of a new twist

[Author]

Posts