I[t] went down, down, down and the flames went higher

April 20, 2007 8:40 AM

Why is the value of the US Dollar tanking, and what can I do about it?

I can't help but be incredibly frustrated after watching the US Dollar's value slip further this week (One GBP is more than $2, the Euro is nearly $1.36, and even the Afghani is holding its value better than the dollar - 49.1 AFG to the dollar). As someone who travels and works abroad frequently, I've tried to narrow down what is causing the dollar lose value as I observe it buy less and less in other countries. Many articles state that

Many articles discuss the overspending on housing and "toys" (seriously - how many people can truly afford or justify spending $1500 on a plasma screen?) combined with dependence on the government for income as the problem. If this is the case, is our national "credit" slipping beyond belief? Is our government hemorrhaging money so much that it's killing our currency? What's really happening here?

Secondly since I, as one small man, can't do anything immediately about the problem what can I do to protect myself from my currency's slipping value? I've considered buying other more stable foreign currencies but I'm unsure of ways to do this without taking massive hits on exchange commissions. I'm up for any and all ideas here.

Thanks.

posted by quadrinary to work & money (32 comments total)

Some cynics have noted that a weakened dollar makes the United States' sizeable debt to other countries a lot cheaper. It also makes imports cost more, which could stimulate domestic consumption.

If you were to invest in American goods now, for example, your paper wealth would eventually go up relative to other economies, if the situation was ever to reverse.

But I doubt the current administration has the brains to actually have thought out this plan and its implications, let alone implement it, so who knows. Also, IANAE.
posted by Blazecock Pileon at 8:47 AM on April 20, 2007

Unless you are a multinational, you really do not have anything to worry about. However, you should be concerned about inflation. You remember how Coke used to be 25 cents a bottle? Of course you don't, but that's because it's been years and inflation that has made it to be worth $1.35 at 7-11.

Although it might look like the British Pound and the Euro are rising against the dollar, that is actually bad news for European companies who have to work in those currencies and have to convert their American business into those currencies. They are paying large costs related to the transfer of that money. Secondly, the American Dollar is still very much in demand, espcially by other governments and private companies that are buying interest-bearing debt. Sure, you've probably gotten a few saving bonds from your parents when you were a kid, but on an average day the American government sells billions of dollars in debt in order to finance things like the war in Iraq, domestic spending, and the paychecks of the millions of government workers in places all over the world.

Someday, perhaps soon, perhaps in half-a-century, those bonds are going to mature. That's where the value of the dollar really matters. Because if the huge number of government who have massive US dollar reserves (like China and Japan, not to mention France, Russia, and Mexico) ever came calling, we would seriously default. Then it would be: America meet Argentina. ;P
posted by parmanparman at 8:50 AM on April 20, 2007

Unless you are a multinational, you really do not have anything to worry about.

... or traveling to Europe. I was in Paris last week and it was terribly expensive.
posted by bitdamaged at 8:58 AM on April 20, 2007

Blazecock Pileon, I was surprised at anyone to see this post a couple of weeks ago detailing who the government owes the national debt to. Turns out about 75% of the debt is owed to US citizens or "intergovernmental debt". Kind of puts things in perspective. By comparison we owe the Japanese merely 7% of the the national debt, and they're the largest foreign debt holder.

Here's the pie chart.
posted by jourman2 at 9:01 AM on April 20, 2007

If you've got any investments, put at least part of them into foreign stocks. Their are US mutual funds that invest in foreign stocks, so this is easily done.

If you're a contractor, get clients overseas and bill them in their currency. I get some of my income in JP¥.
posted by adamrice at 9:04 AM on April 20, 2007

Progressive economist James Galbraith thinks it's a consequence of poor American progress in Iraq. His basic position is that

As far back as 2002, we understood - as the economically illiterate neo-imperialists did not - that a world system very favourable to America was on the line. And it was not, as they seemed to think, just a matter of military might. We knew that if the war undermined confidence in the power, good faith and common sense of the United States, that could lead toward disastrous changes on the financial front.

Four years in and with no end in sight, that risk may finally be catching up to the almighty dollar.

I believe Joseph Stiglitz makes similar points in his new book, but I haven't read it and can't find articles to back that up offhand.
posted by gsteff at 9:05 AM on April 20, 2007

...what can I do to protect myself from my currency's slipping value?

From an investing standpoint, that's exceedingly simple: Buy shares of mutual funds that invest in overseas companies. There're a variety of ways to research them. Forbes, Barrons, Morningstar all research and rank international funds. Personally, I like this one
posted by mojohand at 9:08 AM on April 20, 2007

Here are some good articles from London's The Financial Times on why the dollar is losing value.
posted by HotPatatta at 9:11 AM on April 20, 2007

It's a bit of a larf that the articles quoted all point the finger at the US citizen as the base of the problem. "The problem couldn't possibly be with the US Government or the instruments such as the Federal Reserve that are designed to handle this very issue. It must be Joe Consumer buying TVs!"

IANAEconomist, but here goes:
These sorts of things are terribly complex, but part of the problem is that the US has stopped generating 'trust'. (Intangible, I know.) It has become rather secretive about many financial things, M3, the true cost and duration of the WoT, our energy plans, and other things. This secrecy costs us confidence, which can be currently found in other currencies.

Yadda yadda complexity yadda yadda mortgages bankrupies and so on.
posted by unixrat at 9:18 AM on April 20, 2007

I've considered buying other more stable foreign currencies but I'm unsure of ways to do this without taking massive hits on exchange commissions.

Another option which gives similar results and is much cheaper to do is to invest in foreign index funds. If you believe that a global shift in power and wealth is occurring than this would be a way to profit off of that. But this is by no means a hedge (and neither is just buying foreign currencies) and if you are wrong about the underlying assumption then you will lose not gain money.
posted by tr45vbyt at 9:20 AM on April 20, 2007

This is a boon for firms like Coca-Cola and other US multinational corporations who will have all those high priced currencies pouring into their coffers.

Economists will blame it on inflation, housing, toys or really anything because there a lot of things out there they can blame it on. Doomsday-ers get a lot of press, but confirmation bias only lets us see when they are right.

There are plenty of US companies where the profits flow back to the US and who do significant business overseas. They start making more money and the dollar begins to even out to other currencies. It is like the circle of life, only probably more vicious.

People can and do make money off high-trade day-to-day machinations. I recommend you stay away from this, sock your money in an index fund and not try to worry.
posted by geoff. at 9:28 AM on April 20, 2007

>From an investing standpoint, that's exceedingly simple: Buy shares of mutual funds that invest in overseas companies.

So buy high and sell low?
posted by mrbugsentry at 9:29 AM on April 20, 2007

I also get some income in Japanese yen, like a poster upthread, and believe me, the dollar isn't tanking in Japan. Just the opposite. Interest rate differentials and other things have kept it relatively high to the yen over the past year. (Of course, the yen is wickedly higher to the dollar in comparison with pre-1985 rates).

The Euro and other currencies are at high points right now, but that's not true for all currencies in the world, all's I'm sayin'.
posted by Gordion Knott at 9:43 AM on April 20, 2007

I don't think that the currency slip can be blamed on the war in Iraq, at least not totally.

I have a very particular recollection of reading a column in the NY Times (either the Times or the Boston Globe) in early/mid 2001 -- so that's pre-9/11, pre-war -- about the slide of the dollar relative to other currencies, particularly the Euro, which at that time was just beginning. I had just read a book or something on macroeconomics so I found it pretty interesting.

The crux of the article (and I remember it because there was an accompanying editorial cartoon of a dollar sign jumping down onto a see-saw, with the Euro on the other side) was that the Fed and the USG were intentionally allowing the value of the dollar to fall against foreign currencies in order to make the national debt cheaper, and discourage imports while making US exports and tourism more attractive.

I have no idea whether it actually worked, and I've no doubt that the war and other expensive activities undertaken by the post-9/11 government have contributed further to the slide, but it was definitely underway (or at least someone thought so) before then.
posted by Kadin2048 at 9:45 AM on April 20, 2007

I don't understand what any of your linked articles have to do with the falling dollar.

My understanding is that the real problem is the US trade deficit. Here's a historical graph from Mark Wieczorek.

The US can't import more than it exports forever. As economists like to say, "Things which can't go on indefinitely, don't." In order for exports from the US to become cheaper, and for imports to the US to become more expensive, the dollar has to fall. How much? Brad DeLong describes a "soft landing" scenario in which the dollar declines 5% each year for the next five years.

Conversely, if US-made goods became more competitive (e.g. better quality) relative to foreign-made goods, that would tend to push up US exports and push down US imports, and hence push up the US dollar, other things being equal.

what can I do to protect myself from my currency's slipping value?

For your standard of living in the US, the decline in the US dollar doesn't matter. What matters is inflation. (We've gone through this in Canada: the Canadian dollar has dropped as low as 62 cents to the US dollar, and a while ago it was as high as 90 cents. This has major effects on importers and exporters, but in terms of our standard of living, what matters is inflation, which has been consistently low, around 2%.)

For your expenses abroad, you might want to hold some euros. This Google Answers thread points to Everbank as a way to hold euros in a savings account or CD.
posted by russilwvong at 9:53 AM on April 20, 2007

With regards to personal investment - I split the money in my personal retirement accounts evenly between VGTSX and VTSMX as my way to minimally insulate myself against a domestic dip. Although looking at the 10 year comparison of 90% vs 30% makes me wonder if I shouldn't have balanced that a little differently...

Be that as it may, as Gordion says, economies fluctuate. The Euro was about the same strength in 2004 if you look at the chart on this site. I don't think you should concern yourself overly about the relative cost of Euros.
posted by phearlez at 10:00 AM on April 20, 2007

Diversify globally. Buy foreign stocks and funds.

This is good strategy, even if you think the dollar is doing well, though in recent times, many intelligent people have been investing extremely large portions of their money overseas.

After all, would you rather by a US Bond, or a Eurobond? At least for the near future, there's no reason to believe the dollar is going to strengthen, and you can always re-balance if it does.
posted by Tacos Are Pretty Great at 10:04 AM on April 20, 2007

I don't think you should concern yourself overly about the relative cost of Euros.

Why not? If you believe the currency is likely to grow stronger against the dollar, then you gain significant advantage over comparable American investments.

The fluctuation you cite is disingenuous at best, as the Euro was at $0.90 just 8 years ago, and is now at $1.35. It's not all fluctuations, some of it is that America has tanked.
posted by Tacos Are Pretty Great at 10:06 AM on April 20, 2007

For your standard of living in the US, the decline in the US dollar doesn't matter.

This is only true if you don't buy any imported goods.
posted by Tacos Are Pretty Great at 10:07 AM on April 20, 2007

Whether the dollar is weakening or not, in the long run you will benefit from diversifying your investments (e.g., retirement) internationally. Here are some no-load, low-cost mutual funds recommended by Ted Aronson.

1. Vanguard Emerging Markets Stock Index (VEIEX)
2. Vanguard European Stock Index (VEURX)
3. Vanguard Pacific Stock Index (VPACX)

If the dollar declines after you buy these funds, the dollar value of the funds will increase (all other things equal).

If you have a well diversified portfolio of U.S. and international stocks, you won't have to care about a strong or weak dollar.
posted by GarageWine at 10:09 AM on April 20, 2007

Yes, adamrice and mojohand (and probably a bunch of others) are right on; if you invest in funds that have holdings abroad, the change in currency is factored into the share price. Then again, forex fees are also factored into the share price, but they get a better rate than you would because of the size of their transactions.

Anyway, for specific funds, you should look at a list of exchange-traded funds that track international markets. MSCI does a lot of international indices, for example, and iShares sells ETFs based on those indices. See what iShares/MSCI funds your broker can get ahold of.
posted by rkent at 10:13 AM on April 20, 2007

The main reason that the dollar has been falling is the massive US current account deficit. The current account deficit is at an all time high, as a percentage of GDP (6-7%)

The current account deficit is the total amount by which national spending (consumption and investment) exceeds national income. The balance must be borrowed abroad.

(The current account can also be seen as the amount that imports exceed exports, but actually this adds up to the same thing)

The household savings ratio in the US is basically 0, which is highly unusual. See here for comparisons with other countries. The Federal government is in deficit. Companies are saving a little, but overall the US is borrowing like mad.

When the US wants to borrow, it must find people who want to buy dollar assets, or dollar debts. Constantly selling dollars in this way put a lot of pressure on the dollar, which is why it has been declining steadily for the past few years.

This is the logic that encouraged Warren Buffet to put a $20bn bet against the dollar a few years ago, from which I'm sure he has done rather well.

As to protecting yourself, I'm not in the US, and other posters can probably give you better advice

gl
posted by Touchstone at 10:36 AM on April 20, 2007

The short answer: we've been printing too many dollars for a long time. All through the Greenspan years and now into the Bernanke era, we've been printing too much money. The advent of globalization, and then the largesse of the Chinese and Japanese, allowed us to get away with this for far longer than we should. The game is ending. Things are going to get incredibly bad.

We are hooked on underpriced foreign goods, too much debt, and high housing prices, and all of these things are going to blow up at the same time.

This problem has been building for half a generation, and it's going to take at least a generation to work out. Maybe 2.
posted by Malor at 10:38 AM on April 20, 2007

What Touchstone said. A discussion (again from DeLong) of the current-account deficit vs. the trade deficit.

Tacos Are Pretty Great: This is only true if you don't buy any imported goods.

As long as inflation--measuring the total price you're paying for goods and services--stays low, that doesn't matter.

This was the situation in Canada during the 1990s: as the Canadian dollar dropped from the high 80s to the low 60s, inflation stayed at 2%. Central banks work actively to hold down inflation: if rising import prices cause the overall price level to increase, the central bank will raise interest rates to force it down.

That said, the central bank may not always succeed in holding down inflation: historical inflation rates. To protect yourself against inflation, buy inflation-indexed bonds.

Malor: The short answer: we've been printing too many dollars for a long time.

I don't understand this answer. Wouldn't this show up in the inflation rate (which has been only around 3% since the 1990s)?
posted by russilwvong at 11:06 AM on April 20, 2007

The fluctuation you cite is disingenuous at best

I'm assuming you don't really mean to say that the most positive way one could interpret my statement is that I'm being insincere or deceptive, since that would mean the likely interpretation is even more negative. I accept your apology in advance, particularly since you're incorrect.

A quick paste into google spreadsheets shows that the current value isn't far off from where it was three years ago. In fact the variance since then is fairly small.

Being mindful of the position of the dollar in the world and investing with the possibility of it declining in mind is obviously a good thing. My position that the OP shouldn't concern himself overly stems from use of the word "tanking" and the tone of the question, particularly "I can't help but be incredibly frustrated" I say yes, yes you can.

Hedge your investments and pay attention to the economy as a whole, not just dollar value.
posted by phearlez at 11:23 AM on April 20, 2007

The short answer is weaker demand for US dollars. The long answer is:

- Trade deficits with nearly ever reasonably important trading bloc in the world. No demand for dollars to buy US-made goods (what US made goods?), increased US demand for foreign currency to buy foreign imports. The mechanism plays out that the dollar declines against the foreign currency to balance the demand. This is supposed to be "good" because it means US goods are cheaper abroad (and therefore will raise demand for US goods abroad) and foreign goods are relatively more expensive here (thereby lowering the demand for foreign goods which is supposed to improve the trade gap. The problem is we make basically nothing here, and buy more and more crap from over there, so the decline doesn't appear to have an end. Also, China is an exception. See below

- China china china - China has a functionally fixed exchange rate with the US. But China is a huge exporter to the US. Thus there can be no rising Chinese currency and rising prices of Chinese goods to balance this out. Thus, China "overheats" (not really) by shipping us too much stuff that is cheaper than it would be if the currencies floated.

- Eurodollars. Foreign banks (not only European ones) hold a lot of dollars in reserve.

- Interest rates - US rates are too low to attract investment from overseas. The other side of the currency exchange is rate fluctuation. However, we can't raise rates too high because (a) consumer credit is already out of control, and higher rates could shut off consumer spending, and (b) too many people have huge home mortgages at variable rates that would rise and trigger foreclosure. Because of the recent rise in rates since 2004, homes aren't selling for what they once were, so refinance is out of the question, so people are stuck in houses they may not be able to afford or sell at or above what they paid if rates go up. So we have to keep rates down.

Yes it sucks all around. The upside is that because China is pegged to the dollar and china is so heavily reliant on oil to drive its manufacturing economy, the rise in oil prices is forcing them to slow their economy down, which should stop the decline.
posted by Pastabagel at 11:28 AM on April 20, 2007

america is living way beyond its means, not just the people but the country itself. first thing dubya did was cut taxes to give the clinton surpluses back to the rich, instead of using them to fund social security, healthcare, etc. second thing he did was start a very expensive, ultimately futile war. america raises money by selling bonds, essentially, promises to pay back the principal with interest in the future. planet earth is awash in those bonds; china alone has over a trillion bucks worth. we're driving down a dark road at high speed with no headlights, and eventually we're going to run into something hard. we'll either have to default on our promises, or print a lot more dollars to meet them. the rest of the world is watching our foolishness and anticipating what will happen, and that's what currency markets do is anticipate. you protect yourself by buying hard assets. gold, silver, platinum, palladium for a start, at some point in the near future real estate is going to be a bargain after all those subprime foreclosures come back to market, and you can pick up the pieces of other people's shattered dreams.
posted by bruce at 11:55 AM on April 20, 2007

As others have said, it's the trade deficit.

Remember what Cheney allegedly told Paul O'Neil? "Reagan proved deficits don't matter."

If Cheney meant "deficits don't matter to voters in the short term," he was right. Otherwise...

The fiscal shift in the Reagan years was staggering. In January 1981, when Reagan declared the federal budget to be "out of control," the deficit had reached almost $74 billion, the federal debt $930 billion. Within two years, the deficit was $208 billion. The debt by 1988 totaled $2.6 trillion. In those eight years, the United States moved from being the world's largest international creditor to the largest debtor nation.

Reagan Policies Gave Green Light To Red Ink

What you can do about it: invest your U.S. dollars in foreign companies and/or U.S. companies that do big business overseas. Oh, and don't vote for anyone who refuses to take the deficit seriously.
posted by Fuzzy Monster at 12:55 PM on April 20, 2007

Why is the value of the US Dollar tanking

Because the supply of US dollars is gradually starting to increase faster than the demand for US assets. Deficits don't matter until they do.

Mostly I just wanted to link to a chart of M3, since nobody else did yet.

I don't understand this answer. Wouldn't this show up in the inflation rate (which has been only around 3% since the 1990s)?

That depends in part on which measure of inflation you use. I'd recommend picking one that includes for example the effect of the recent inflation in housing prices, ie. not the CPI. Then again, I suppose if the dollars don't show up in the general economy but instead end up as part of the reserve assets of some foreign central bank, they don't generally contribute to price inflation.
posted by sfenders at 1:11 PM on April 20, 2007

Bah. Disregard that last bit. I can't seem to think straight about this stuff today, as usual.
posted by sfenders at 1:14 PM on April 20, 2007

From an investing standpoint, that's exceedingly simple: Buy shares of mutual funds that invest in overseas companies.

-- ones that don't hedge against fluctuations in currency values. Some do, some don't. (I think. I believe I got this from some fairly recent AskMe thread you could probably find.)
posted by salvia at 12:57 AM on April 21, 2007

Oh, also, you might want to read this article. I can't really tell if it's legit or crackpot. It talks about there being some possibility of six gulf countries issuing a common currency (another Euro) in 2010. That would be bad for the dollar because one thing keeping the dollar fairly stable is that everyone has to buy oil in dollars, keeping demand high. (Anyone who has taken more than one economics class knows more than I do about all this.)
posted by salvia at 1:06 AM on April 21, 2007