Dollars on sale, what should we do?

May 9, 2006 10:40 AM

There have been numerous articles lately that the US dollar will lose its value a big time pretty soon, given the fact of our huge trade deficit and over spending. check this article If the US dollar will be on sale soon, I'm wondering if I should still contribute $ to my 401K for retirement. I'm no where near retirement age. But what's the point of saving for retirement, while the value of the saving is going down, faster than inflation? What would you do otherwise for your retirement?
posted by dy to work & money (19 comments total)

My 401k allows you to pick what funds you want to invest in. I have a chunk in foreign stocks. You might want to try that.
posted by CunningLinguist at 10:41 AM on May 9, 2006

If you're convinced that the dollar will rapidly lose value, then you'd be dumb not to invest in something other than U.S. currency.
posted by JekPorkins at 10:46 AM on May 9, 2006

I buy gold, but I'm an zealot for the elements.
posted by Mean Mr. Bucket at 10:51 AM on May 9, 2006

1) Uhm that's from a Gold site. Mildly biased with regards to this particular issue

2) You are retiring in the US correct? Then your concern is inflation eroding the purchasing power of your money. You can buy TIPS to protect against this. Also you should be diversifying your portfolio with at least some allocation to non-US equities regardless of your thoughts on the USD. Heck maybe even some gold if you are super nervous.

3) You are basically trying to speculate on a dollar "collapse" with a thesis predicated on economic theory. On paper you may be right. In practice economists have been shown to be terrible at forecasting things like fx rates. I think its a fools game. Especially in a currency like the USD that doesn't have an artifical peg that can break.

4) No idea how old you are, but if you are several decades away from retirement a few years of compunded 1%-2% real returns will make a meaningful difference in your long-term wealth accumulation. Saving is almost never the wrong thing to do. Only time it might not be optimal is in a deflationary environment in which interest rates are negative in real terms. Don't use dollar fears as an excuse.
posted by JPD at 11:03 AM on May 9, 2006

401k contributions are pre-tax and possibly matched by your employer. Earnings are untaxed until withdrawal. Inflation would have to spike by quite a bit to erase those benefits. And, like everyone above points out, your 401k plan may allow you to invest in non-dollar-denominated funds.
posted by bonecrusher at 11:57 AM on May 9, 2006

First of all, you don't want to just leave your money sitting around, by all means contribute to your 401k, especially if there is a match.

If you really want to bet on the dollar you can buy funds like ProFunds Falling U.S. Dollar (FDPIX) or Rydex Weakening Dollar (RYWBX), both are funds that bet on the currency market. Or you can do what everyone generally advises, and just get a diversified, low-fee portfolio. Your choice.
posted by blahblahblah at 12:36 PM on May 9, 2006 [1 favorite]

--I'm wondering if I should still contribute $ to my 401K for retirement.

Yes.

2) You are retiring in the US correct? Then your concern is inflation eroding the purchasing power of your money.

Exactly correct. If the dollar depreciates 50% against the Euro, but inflation stays at 2-3%, it won't matter to you. What matters is how much you have to pay for your housing, food, clothes, etc. And you don't buy them with foreign currency, you buy them with US dollars.

As I understand it (from reading this paper by Brad DeLong), there's two likely scenarios. One is that the dollar drops sharply, but there's not much pain:

Domestically oriented macroeconomists look at the situation roughly like this: at some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar-denominated securities. It looks like in 2005 China, Japan, and other Asian central banks will buy $500 billion of dollar denominated assets in order to prop up the greenback so that their exports to the U.S. continue to flow and grow. Eventually, this massive flow of foreign funds must stop.... When they cease their large-scale dollar-purchase programs, the value of the dollar will fall—and it will probably fall hard.

But, according to the domestically oriented macroeconomists, this devaluation is not a large problem for the United States. ... As the dollar’s value declines, U.S. exports will become more attractive to foreigners and American employment will rise, with labor re-allocated to the newly-vibrant export sector. It will be like what happened in Britain after it abandoned its exchange-rate peg and allowed the pound to depreciate relative to the Deutschmark, or what happened in the U.S. in the late 1980’s, when the dollar depreciated against the pound, the Deutschmark, and—most importantly—the Japanese yen.

The pessimistic view:

International finance economists see a far bleaker future. They see the end of large-scale dollar-purchase programs by central banks leading not only to a decline in the dollar, but also to a spike in U.S. long-term interest rates, both nominal and real, which will curb consumption spending immediately and throttle investment spending after only a short lag.

To be sure, international finance economists also see U.S. exports benefiting as the value of the dollar declines, but the lags in demand are such that the export boost will come a year or two after the decline in consumption and investment spending. Eight to ten million workers in America will have to shift employment from services and construction into exports and import-competing goods. This cannot happen overnight. And during the time needed for this labor-market adjustment, structural unemployment will rise.

Moreover, there may be a financial panic: large financial institutions with short-term liabilities and long-term assets will have a difficult time weathering a large rise in long-term dollar-denominated interest rates.

But even (especially?) in this pessimistic scenario, it still makes sense to have built up your savings.
posted by russilwvong at 12:37 PM on May 9, 2006 [1 favorite]

I think everyone covered the most basic points: TIPS and Foreign Funds.

One addition on foreign-stock funds, though: Make sure that the fund you choose is not hedging currency risk. Some funds, as a matter of policy, will hedge all foreign currency transactions using forward contracts. That means that the fund is essentially shielded from any currency rate movements, defeating your whole purpose for buying the foreign-stock fund (of course, you could also be buying it because you think foreign stock markets will gain more than the U.S. stock market, or to balance your risk of the U.S. stock market). The point is, a currency-hedged foreign fund would not meet your objective.

Therefore, try to find a fund that either hedges only in one direction (only hedges against the dollar getting stronger), or doesn't hedge at all. The prospectuses of foreign funds will explain to you whether the managers are using any mechanisms to decrease currency exchange risk.
posted by tuxster at 12:43 PM on May 9, 2006

A better bet than either of those funds might be to just buy foreign stocks. Choose something low-fee. This article (from MSN) suggests that people betting against the dollar should get iShares MSCI EAFE Index (EFA), however, it is designed to match the MSCI EAFE Index which basically matches the performance of large indexes in Europe, Australasia, and the Far East.

I don't own any of these by the way, so YMMV.
posted by blahblahblah at 12:43 PM on May 9, 2006

On preview, I would stay away from the funds blahblahblah mentioned (he does make the point correctly, but I'm not sure it's clear): those two funds, ProFunds Falling U.S. Dollar (FDPIX) or Rydex Weakening Dollar (RYWBX), are "betting" specifically on the dollar weakening. That means, they will have miserable performances if the dollar stays the same or strengthens. These are different than non-hedged foreign funds, who invest in good companies overseas and chooses to accept the currency risk; they do not "bet" one way or another.
posted by tuxster at 12:47 PM on May 9, 2006

I second the suggestion of TIPS.

If the US dollar cracks, then you would expect inflation to go up, so some inflation protection would help.

Another approach is to get a diversified collection of gold mining stocks. Some of the better gold stocks also pay dividends.
posted by storybored at 1:14 PM on May 9, 2006

Yeah, the answers depend on what your prediction of the future is, and whether you feel confident enough in your prediction to defy the recommendations of experts who disagree with you.

If you believe that the US dollar is likely to decline significantly in real value, the classic hedge is gold. Holdings in other currencies, other countries, and other elemental goods unlikely to lose value are other ways to hedge against this. Most 401(k)'s offer funds that invest in metals or in foreign countries.

If you believe that the dollar is going to be so worthless that the structure of US society is going to change radically for the worse (bank runs, inability to cash out your 401(k), or non-acceptance of US dollars for real goods), that's when to skip investing in your 401(k). Invest in real estate and guns, spend money to take classes on survival skills, and build a high wall around your land.

If you agree with the party line (propaganda?), and think that the US economy will probably continue to grow, invest in an index fund or a brand-name balanced stock fund.
posted by ikkyu2 at 1:23 PM on May 9, 2006

If your 401k offers matching funds, if you don't fund your 401k up to the amount your company matches it, you are essentially passing up free (or extra) money from your company.
posted by drezdn at 1:30 PM on May 9, 2006

Would it be completely crazy to buy Chinese yuan, which everyone acknowledges are undervalued? I mean, they won't keep them undervalued forever, will they?
*That isn't advice, it's a question. I know nothing about these things.
posted by leapingsheep at 1:41 PM on May 9, 2006

Arguments in favor of growth, by the way, include a pretty sound argument that, of the 3 factors of production, two of them are pretty much guaranteed to keep increasing here in the USA in the future. The 3 factors are land, labor and capital.

The US invests a lot of money in infrastructure development (roads, water pipes, electric and gas supply infrastructure) to bring more land on-line in an economically productive way. The US birth rate is stagnant, but over the next 40 years about 80 million people are expected to emigrate to the U.S. Because of immigration restrictions in place, and because of what epidemiologists call the 'healthy immigrant bias', most of those 80 million people are expected to be young, healthy, relatively educated or skilled adults who will enter the labor force and expand it. Because the U.S. is an attractive destination for these folks, the U.S. economy gets this extra factor-of-production as a freebie.

The links above, including the one you're worried about describe why some economists think foreign influx of capital - the 3rd factor of production - might decrease. Bear in mind that for that prediction to come true, not only must the U.S. be less attractive to foreign capital than it is now, but there must also exist a more attractive destination. (India? China?) These predictions might come true, but they might not. Historically, the US has always been a very favorable place for capital, and the reasons are not just related to inertia.

While the world is shifting to a less US-centric economy every day, it's not clear to me that the underlying fundamentals that have made the US attractive to capitalists worldwide are necessarily going to alter radically in the next few years.
posted by ikkyu2 at 1:43 PM on May 9, 2006

In case anyone cares, I took my retirement fund mostly out of a gold fund, where it's sat for the past year or so, and I put it into a fund that is comprised mostly of the public stock of Wall Street i-banks and brokerages. (I left about 10% of it in gold, as a hedge.)

This is sort of meta-investing; it's pretty clear to me that a few bumps are coming, and the boys on Wall Street have historically been pretty good at riding those out and coming up on top.
posted by ikkyu2 at 1:48 PM on May 9, 2006

If you are tempted to jump into gold by today's headline that gold has reached its highest price since 1980, keep in mind that if you had bought gold 26 years ago in 1980 you would not have made a dime on your investment in all those years. Meanwhile, inflation is up by more than 150% and the DOW has increased more than 1000%.

As others have said, TIPs or short-term bond funds will provide inflation protection and non-hedged international equity funds will provide some protection against a falling dollar. TIPs can be purchased directly from treasurydirect.gov or indirectly through a mutual fund such as Vanguard's TIPs fund.
posted by JackFlash at 3:33 PM on May 9, 2006

If you want a CD or bank acount in euros or yuan, which you contribute to in dollars, see EverBank.
posted by Rash at 5:26 PM on May 9, 2006

Would it be completely crazy to buy Chinese yuan, which everyone acknowledges are undervalued?

I'm fairly sure you can't just buy yuan on the open market.
posted by wilful at 5:46 PM on May 9, 2006