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An Observation of the Dollar

Posted by Connor on May 14th, 2008

photo credit: bikeracer

Having just spent a couple of weeks overseas, I am left to mourn for our currency. You might think that’s strange, or that I should have more important things to mourn about (I do). But dealing with the current conversion rate and seeing the horrible purchasing power of our nation’s currency leaves me frustrated and worried for our fiscal future.

Apart from those who watch the dollar index and financial reports, most Americans have yet to feel the damage from the devaluating dollar. Sure, gas is more expensive, groceries have gone up a bit, and some shortages are occurring. But contrary to what some believe, price inflation is not inflation itself, but the result of real inflation—the introduction of new currency into the market. Thus, while some believe that inflation is when prices go up, that is only the byproduct of what’s really going on.

The easiest way to see the result of inflation is to change markets—in other words, move into a different currency and see what you can get. Price inflation in any market is usually a slow trickle that takes a while to make itself visible in every aspect of the economy (one notable exception, of course, is hyperinflation, which everybody knows about the minute it occurs). But moving your currency into a different one forces you to exchange it at the current market value and either enjoy a deflated target currency (if, say, you’re moving euros into dollars) or suffer from an “expensive” target currency (going the other direction, dollars to euros).

Ever-historic lows for the dollar mean that you’re having to pay more and more for the same items. Buying anything abroad will ultimately be more “expensive” in the short term, since you’re sometimes still able to buy the items for less cost at home where the price inflation has yet to trickle down.

As I observed the prices of various items and services on my vacation, I was left to cringe each time I would multiply the price by two to see what the cost was in terms of dollars.

The future of the dollar is grim. This is nothing new (I’ve been trumpeting this line for a long time), but it bears repeating. As the dollar rapidly and steadily declines in value, it becomes necessary to look for alternative currencies and commodities for long term value investment and storage.

We can point fingers all we want (I do often enough—the Fed, the current and previous administrations, Congress, etc.), but things aren’t likely to change any time soon (especially since those proposing serious and much-needed change are pushed to the fringe and ignored). Thus, the best thing we can do is prepare and act as best as we can within the circumstances allotted us.

I mourn the dollar and the erosion of our hard-earned savings. I mourn the legalized theft and secretive inflationary tax that allows powerful men to confiscate wealth and create money out of thin air. But most of all, I mourn the state of amnesia and ignorance in which the majority of Americans live. They will suffer the most, when things really escalate and they are unable to prepare any longer.

Fare thee well, dollar.

***************

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7 comments so far. Care to chime in?

I think most Americans are not fully aware of our dollar’s shrinking value.

I went to Germany in October 2001 (less than one month after 9/11) and my dollar bought me 1.15 Euros. I returned to Germany in 2004, and my dollar only bought me 85 cents. I then returned to Germany in the fall of 2007, and my dollar only bought 73 to 74 cents. Today, if I went, my dollar would only buy approximately 64 cents of a Euro.

This means my dollar has declined in value against the Euro by about half since 9/11.

This drop in value compared to the Euro might be caused by a number of reasons – - could it be that the Euro is getting that much stronger? Or is it because our Dollar is getting that much weaker?

I learned on my last trip in 2007, was that the Euro is also declining in value! A few different Germans all complained to me about their weakening economy, and I asked them how that could be true because of my experience with the exchange rate over the years. I was almost in disbelief that their economy was sinking.

I did a little study and found that my German friends were correct. The Euro is sinking in value. It just so happens that our own Dollar is sinking even faster than the Euro!!! So to say that my Dollar has lost half of its value against the Euro since 9/11 is really only part of the story! Compared to other factors in the world, my dollar has been devalued by even more than half since 9/11.

No wonder oil prices are $120 per barrel now. If one considers that it takes more than twice the numbers of Dollars to buy that same barrel of oil now, we can understand that our $3.70 per gallon gas should only be costing $1.80 per gallon or less (if you do just some simple estimates in the purchasing power of our Dollar on OPEC’s market).

Connor, you said you had to multiply the Euro price by 2 to figure out how many US Dollars it was costing you. Does that mean you were only getting about 50 cents to the dollar? Or were you just guesstimating the 2X factor for simplicity’s sake?

#1 Kelly W. | May 14th, 2008 12:12 PM

Connor, you said you had to multiply the Euro price by 2 to figure out how many US Dollars it was costing you. Does that mean you were only getting about 50 cents to the dollar? Or were you just guesstimating the 2X factor for simplicity’s sake?

I was in Scotland (which uses the pound), which trades at just over two dollars for every pound.

#2 Connor | May 14th, 2008 12:16 PM

I didn’t think of pounds, since you mentioned Euros in the post. I guess Scotland is in the EU, but still uses the pound.

Looks like the Euro and pound are trading about the same. On today’s exchange rates, the Dollar would only buy 0.64 Euros and 0.51 pounds.

#3 Kelly W. | May 14th, 2008 12:27 PM

Maybe I’m just tired, but I’ve wracked my brain trying to figure out what an “alternative currency” is. Are you referring to something like the gold standard, or did I miss entirely?

#4 Clumpy | May 15th, 2008 1:56 AM

Clumpy,

As currencies are nothing more than stores of wealth (promises of redemption to demand the services/goods of another), they can take many forms. Historically they have been shells, tree bark, and other things that at the time were seen as valuable, limited in quantity, as storable by those that used them.

Gold/silver have long fit the mark. Since their supply is not easily able to be altered by those in power, they are a hedge against inflation. Looking at historical charts clearly indicate their ability to preserve wealth while the dollar declines.

But when I speak of alternative currencies, I not only refer to gold/silver, but any form of preserving one’s wealth. This might be the euro, or it might be a few bushels of wheat. Whatever the commodity, it should be something that will have demand down the road, so if you desire, you can get rid of it and acquire something else (the purpose of currency).

#5 Connor | May 15th, 2008 5:59 AM

I would suggest the currency the world is being based upon today is a barrel of oil.

We can visualize gold or silver being the basis for money, since our Dollar was at one time based upon gold and silver.

When the gold price climbs to $1000 per oz., the ounce of gold stayed the same, being a standard. What fluctuates is the value of the paper money, not the gold. An ounce of gold is the same now as it was in 1913. Gold is something of value that can be standardized and used and recognized everywhere.

I suggest one of those standards today is a barrel of oil. A barrel of oil is the same barrel of oil today as it was in 1913. When the price of a barrel goes up, it only represents the increase in the amount of paper Dollars it takes to purchase it.

A “Dollar” or a “Euro” or a “Pound” is not a standard, and their values fluctuate up or down, whereas the value of gold, silver or oil are constant.

At least that’s the way I see it.

#6 Kelly W. | May 15th, 2008 7:52 AM

Awright, Connor – thanks for clearing that up. I was pretty sure that you were referring to something of that sort.

Any monetary system is merely an illusion that everybody agrees upon, but I too am of the mind that tying money to some physical substance like gold or silver – something that we don’t have the ability to readily create – creates a stabilizing effect and helps keep government from making insane decisions regarding currency. Of course, they love making insane decisions so a return to a physical standard seems unlikely. With the trillions pumping through the world’s economy I’m not even sure that it’s completely possible, but something seems worth a shot.

(Of course, I’m aware that currencies fluctuated, and I hardly have doomsday on my mind for the U.S.)

#7 Clumpy | May 15th, 2008 8:18 PM

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