The Dollar Plummets against major currencies – Is this important?

Turn on the television, read any newspaper and every opinion will be supported by the fall of the dollar. There are those who say the dollar falls because US interest rates are low while other countries have higher rates. There are those who will say the exchange rate shows that the US economy is tanking while turn the page or wait for the next news story and this idea will be refuted, forcefully declaring, “The dollar’s decline is perception, it is driven down by those who hate America, it has nothing to do with the goldilocks economy, the greatest story never told.”

The fact is that a currency is simply a representation of equity. If the country produces or saves more and keeps the same number of monetary shares (dollars in the case of the US) then the currency increases in value. If the country spends more than it produces or prints more money while equity remains the same then the value falls. This is like a stock split, more stock, each worth less.

In a country’s equity is “goodwill”. This is the same for companies. Goodwill is the value of the name, the existence of products, procedures and other intangibles. Goodwill indicates an arbitrary value for future reduced costs for an established company when compared to a new company. A simple example of Goodwill is that if Microsoft creates a new spreadsheet at the same time as Apple, Microsoft will sell more with fewer advertising dollars. This is the value of Goodwill.

Financial markets look at exchange rates based on what will happen in the future. So current exchange rates do not reflect today’s value but a value moved out about 12 months. In this way the economy affects exchange rates or more appropriately, the exchange rate reflects the perception of future tendencies. Today’s decline in the dollar could be seen as the perception that the US economy will perform poorly over the next twelve months while the trade deficit or saving’s rate will remain at the current dangerous levels. To say it simply, those with money think that in the near term future the equity value of the US will be less than it currently is.

Is this really important to you and me? Unfortunately the answer is yes. Our government, over the last 30 years, has taken us away from a production economy into a smoke and mirrors service economy. Over 60% of what we consume comes from foreign sources. As the dollar loses value our products increase in cost. While increasing labor costs are more than offset by productivity thus inflation negative, the falling dollar is inflationary. This will cause the Federal Reserve to increase interest rates, slowing consumption, creating greater instability with a great risk of StagFlation. Yes, the worse case scenario for any economy.

Our only solution to this situation is to reduce imports, recreate our infrastructure and production facilities, bite the bullet, increase taxes to pay down debt, and suffer for a few years. Reaganomics has dilapidated the wealth of our nation. Our current leaders are pushing ever harder to take this to the next level. I can only assume that since Mr. Bush’s Presidential legacy of stabilizing the Middle East did not happen that he is working on something else to be remembered by. I personally believe that the failure in the Middle East is bad but the consequences of these economic policies are significantly worse. No it is not all his fault, our country has been under attack by corporate raiders since Reagan, but it is his fault continuing on this path.

Our politicians criticize Europe for “Disastrous Economic Policy” yet their share value (the Euro) has increased 80% since 1998. The United States share value (the Dollar) has lost 50% of its value. This is not a short-term manipulation. It is a longstanding trend.

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