April 4, 2011

Visual: What's Happening to the Dollar

What's happening to the U.S. dollar?  It's in decline against major currencies, that's what.  As debt is monetized (i.e. more and more money is borrowed and printed) the inflation that hits consumers also hits the value of the U.S. dollar.  More U.S. dollars without more wealth creation means each bill holds less value.  It's been referred to as more dollars chasing the same goods.  There are very serious implications to this for the country and for ordinary Americans which merit a lengthy discussion.  But let me first show you visually what is happening.

The U.S. dollar versus the Japanese Yen.  Japan is in worse debt shape than the U.S. - for now.

Next take a look at the dollar against the Chinese Yuan.  China is seen as the next economic superpower. Since they've allowed their currency to float against the dollar, a little bit, the same pattern is clear.  The dollar is losing value against the yuan,

The trend is pretty clear.  Next look at dollar against a more normalized currency.  China is quickly emerging and Japan is suffering it's own economic malaise for the last two decades.  Maybe they aren't representative of  regular currencies.  What about Australia?

Or Canada?

Those look almost identical.  How about a nation soon expected to be emerging - Brazil?

Soon after its most recent incarnation, the real gained value against the U.S. dollar, due to large capital inflows in the mid 1990's. Between 1999 and 2002 the currency's value against the dollar declined due to the fact that there was an expectation of a radical leftist electoral victory (Luiz da Silva), which prompted both a currency crisis and an inflationary spike. After the election, when da Silva promised to follow a stable macroeconomic policy. Since then, the trend looks quite familiar compared to the U.S. dollar. 

What about the Euro?  It's the same story as other currencies - a general decline in the U.S. dollar with a bumpy ride for Europe since the economic crisis of late 2008, but not enough of a bumpy ride to push the dollar towards it's 10 year high

What does all of this mean?  Not much on it's own.  These are merely indicators.  But they do indicate that the U.S. dollar is losing its value against other currencies, which if unabated will impact the dollar's role as the world's reserve currency.  What that means is frightening.

The United States is in a unique position as the world's reserve currency holder.  It alone can pay for it's foreign debts and imports by printing more money.  But as it reaches it's debt limit that gravy train of spending more than it can afford risks coming to an end as other countries start becoming hesitant to accept an ever-weakening dollar.  There has already been talk of nations moving away from the dollar.  The net impact to U.S. consumers is a lowered standard of living as foreign goods suddenly become more expensive in real terms and purchasing power declines to realistic levels.  People are unwilling to accept that sort change - look at the protests in Wisconsin - and a system shock such as that could get ugly very quickly.

The solution?  Stop growing the debt.  Stop spending yourself out of a recession, and stop making it so hard for the private sector economy to create jobs in America ( reduce business taxes, and reduce regulation).  That is the only way out and the door is shutting faster and faster. 


  1. You might add stop injecting printed paper into the economy that is worthless. Every country that has tried to print to much phony money has and will fail!!!


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