U.S. Dollar fell 35 Percent Over 18 Years from 1984 to 2002 – The U.S. Dollar then Dropped Over 40 Percent from 2002 to 2007: How the Dollar is Being Systematically Devalued since the 1980s. 5 Reason why a Weak Dollar is bad for America.
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The U.S. Treasury and Federal Reserve have kept quite in recent months about any strong dollar policy. Last time Timothy Geithner was in China he was laughed at by students when he insinuated that the U.S. would get its economic house in order. The Chinese students realize just like most Americans do, that the U.S. and China are stuck at the hip for years to come. Yet what most Americans probably don’t realize is their central bank is systematically trying to destroy the currency they hold. This isn’t new. This has been going on for well over two decades. The U.S. Treasury and Federal Reserve are now on a full scale mission to cut the dollar value in half.
Now why would the U.S. Treasury and Federal Reserve want to do this to the average American? I think some Americans actually think these bank bailout machines are actually looking out for their best interest. They are not. Why do you think we have over 26 million unemployed and underemployed Americans even though we have committed trillions of dollars to bailouts? Last time I checked most of the big banks are still standing while millions of workers are not.
Let us first pull up a chart of the U.S. dollar:
The U.S. dollar index hit a peak in 1985. If you may recall, the Federal Funds rate at the time was over 11 percent. Can you imagine that? Talk about popping the housing bubble. But over 18 years the dollar lost approximately 35 percent of its value. This occurred by a declining Fed funds rate and spending more than we produced. Little by little we exported our future away. What is more disturbing about the chart above is the quick destruction of the dollar in the last few years. From 2002 to the lows reached in 2008, in a little over 5 years we gave up over 40 percent of the U.S. dollar index value. So what took us 18 years only took us 5 years this time around.
The path is unmistakable. The U.S. dollar is being targeted. Why? It is the only way we can pay our way out of the current debt. Also, the global economy is completely dependent on the American consumer. They need us to spend to keep going (ironically). This is where the myth of decoupling is shattered.
So why is this bad news for you?
1 – More Expensive Imports
First, even if we had a balance of trade a weaker U.S. dollar would help our exports but we have anything but a balance. If you haven’t noticed we import so much more than we export that in the end, the already strained American consumer is going to be paying a whole lot more for items.
We are still negative. The only reason the chart is moving up is because Americans are spending a lot less. Americans are accustomed to buying cheap goods that come from low wage countries. There isn’t much that can be done in terms of competition here unless people would be happy making $5 a day. So the argument that this is good for our exports is only a short term argument.
Since these things take time, what we are seeing right now is a draw down of inventory causing deflation. Yet what will happen after that and assuming the Fed gets its way by slamming the dollar? Expect to see the cost of goods shoot up. The U.S. dollar has been falling for 30 years so it is hard to see how we reverse this pattern.
2 – Global Garage Sale of U.S. Assets
Remember the ports being sold to foreigners? Didn’t go so well did it. If the U.S. dollar is hit any further you can expect this to be a common occurrence. France experienced much of this after World War II when American companies started buying up French businesses. The French didn’t much like that but American companies went out with a powerful U.S. dollar. The tables seemed to be turned. Now this is going to expose many questions and you can expect this to be a politically charged issue in years to come.
3 – Do you Enjoy Traveling Outside of U.S.?
Enjoy traveling outside the U.S.? Try going to Europe and seeing how far your dollar will go. Try going to Japan and see how strong the dollar is. Go to Britain and see how easy it is to get by with a few hundred dollars. It is somewhat nostalgic to watch Mad Men and have them go to Europe and seeing how life would be with a strong dollar. We have to watch it on TV because that isn’t the case today.
Most Americans do not travel outside the U.S. so this might not be noticed but it is important to pay attention to this.
4 – A Weak Currency Hurts Global U.S. Leverage
We’ve already seen a weaker dollar hurt our standing in the world. Countries now openly talk about creating another reserve currency. Treasuries are still selling but only to our major trading partners. This won’t go on forever. We’ve reached the zero bound. We are literally trading on the goodness of strangers. In the early 1980s the Fed was offering 10, 12, and even 15 percent on the funds rate so you were able to lock in Treasuries in the double digits. That was probably a once in a lifetime buy. Now, the Fed is at zero and really has no wiggle room. Politically, all it can do is appease our big buyers in China and Japan.
5 – Your Dollar Denominated Savings will Dwindle
The U.S. Treasury and Federal Reserve want to systematically cut the dollar by 50 percent or so in the next 5 to 10 years. But as we’ve seen in this crisis, in an irrational world things don’t always go as planned. To think this process will run smoothly is naïve. Americans are already feeling the reality of a weaker dollar. Stagnant wages over a decade. Many average Americans in dual income families are wondering why they are earning the same and working twice as hard. It is because the dollars they are getting paid in our worth less and less.
We really can’t cut costs much more on goods that we import. So in the end purchasing power will be hurt. With the housing bubble bursting we see a quick adjustment bringing values back in line to local area incomes. Yet at the same time, higher unemployment and stagnant wages create this race to the bottom. Trying to play with a currency is not an easy task and the Fed has been trying to meddle with so many things for decades. The housing bubble was largely caused by the Fed cutting rates in the early part of this decade. It would appear the U.S. dollar has one way to go if it were up to our U.S. Treasury and Federal Reserve.