JACIE LANDEROS / Union-Tribune
Posted on 04/09/2008 2:42:49 PM PDT by BGHater
As the once-mighty U.S. dollar continues to sink against other currencies, some San Diegans are confronting the reality that their money is worth a lot less than it once was.
JACIE LANDEROS / Union-Tribune
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Environmental consultant Kevin Clark in Mira Mesa has started looking at Tijuana as a potential place to open a savings account, since the peso is stronger than the dollar right now and Mexican banks offer higher interest rates than their U.S. counterparts.
Nena Norwood, a freelance writer in Hillcrest, was among about 600 investors from Southern California who traveled to Newport Beach last week to hear longtime dollar bear Peter Schiff tout the benefits of investing in foreign stocks and currencies.
On the other hand, Kim Benson, an exporter in Rancho Bernardo, is pleased by the falling dollar because it makes it easier for her to sell her goods abroad.
“Our sales went up almost 30 percent last year, and they're doing even better this year,” said Benson, vice president of Cange & Associates, which sells high-end kitchen appliances overseas. “The drop in the dollar might not be good for the rest of the economy, but it's great for us.”
The dollar has been dropping against the euro and other major currencies for seven years, but the decline has accelerated recently. Last week, the dollar dropped 2.4 percent – the biggest decline in more than two years – reflecting the belief among currency traders that the Federal Reserve will continue to cut interest rates, thus weakening the dollar further.
On Friday afternoon, the dollar was trading for $1.5798 euros, a figure not far from its all-time low of $1.5903 established March 17.
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In contrast, the euro was trading for 94 cents when George W. Bush was inaugurated as president seven years ago. Since then, the value of the dollar has dropped more than 60 percent.
Most analysts expect the currency to drop further. Gary Schlossberg, an economist with Wells Capital Management in San Francisco, predicts that the dollar will decline through the middle of the year as long as the Federal Reserve continues cutting interest rates.
“On balance, I'd say it's a positive right now, since it has added to our economic strength through strong exports,” Schlossberg said. “But it does have a downside. When you suffer a loss in your exchange rates, you suffer a loss in your standard of living. And the dollar's decline can be unsettling for the financial markets.”
The weakening of the dollar began in the summer of 2001, when the Federal Reserve started lowering interest rates to prevent a recession after the implosion of the dot-com boom. The Sept. 11 terrorist attacks, the Enron wave of corporate scandals and the war in Iraq pushed the Fed to lower rates further during the next two years.
Burgeoning foreign trade deficits also weakened the dollar. During Bush's presidency, the trade deficit has doubled and is now more than 5 percent of the gross domestic product.
“The huge trade deficit must be financed either by attracting foreign investment in new productive assets in the United States or by printing IOUs,” said Peter Morici, an economist with the University of Maryland.
Because foreign investment has provided only about 10 percent of the cash needed to balance against the trade deficit, the United States has to sell currency, Treasury bills and other debt instruments to foreign countries. Those IOUs now total about $6.5 trillion.
“That floods world financial markets with U.S. dollars and paper assets,” Morici said. “And it evokes an iron law of the universe: If you print too much money, it won't have any value.”
Foreign demand for U.S. debt helped create the mortgage crisis. Banks and mortgage brokers extended loans to home buyers and then sold the mortgages to Wall Street firms, which packaged them into securities and sold them abroad. As foreign demand for these mortgage securities grew, the banks and brokerages extended ever-riskier loans.
When those mortgage packages turned sour, foreign investors sharply cut back on their purchases of any Wall Street bonds. Starved of the investment, banks cut back on lending, pushing the economy into a sharp slowdown.
CHRIS WARDE-JONES
/ Bloomberg NewsOver the past seven years, the value of the dollar has fallen more than 60 percent against the euro - including a 2.4 percent drop last week.
The slowdown made foreign investors even more leery of U.S. assets. They have increasingly switched from the dollar in favor of sturdier assets, led by the euro and gold. That has driven the price of the dollar lower.
“We got here by making a mess of our finances over a very long period of time,” said Chip Hanlon of Delta Global Advisors in Huntington Beach. “We've built up too much debt and we've created an environment where we don't produce enough to pay for the debt, meaning that we have to depend on foreigners to buy our bonds.”
The plummeting dollar has complicated U.S. trading relationships. Although it has made many U.S. goods cheaper, leading to an increase in exports, it has also made foreign goods more expensive – notably oil. Since August, when the Federal Reserve embarked on a spate of dramatic interest rate cuts, the cost of oil imports to the United States jumped more than 40 percent, from $3.1 billion to $4.4 billion, widening the trade deficit.
The dollar's plunge has made nearly all foreign goods more expensive.
San Diego venture capitalist William Buechler, who has invested heavily in New Zealand, ran into a string of complaints about the dollar during a recent journey.
The New Zealanders were complaining about how hard it was to sell their goods in the U.S. market, because the plummeting value of the dollar had made their goods much more expensive. At the same time, Buechler's wife – who was doing some window-shopping in New Zealand – felt suddenly poorer, because her U.S. dollars could not pay for what they once did.
“Everything was more expensive – clothes, electronics, cars,” Buechler said.
Buechler said he has done well in New Zealand by refraining from investing in exporters, who are now at the mercy of the falling dollar. Instead, he has concentrated on oil, energy, infrastructure and agriculture in the domestic market.
The drop in the dollar is leading a number of Americans to consider investing outside the country. Peter Schiff, head of Euro-Pacific Capital in Newport Beach, said his business has been skyrocketing because of its emphasis in overseas investment.
“Basically, I'm trying to help people get rid of their dollars before the dollar loses more of its value,” Schiff said.
Schiff, who has been critical of the dollar for years, is recommending that investors put their money into the euro, the Singapore or Canadian dollars and the Swiss franc. He also recommends investing in basic industries abroad, such as energy, utilities, agriculture and infrastructure.
“Foreign creditors are not going to lend us any more money,” Schiff said. “The party's over. Now we have to deal with the hangover. And the economy is a mess.”
Six hundred people attended a dollar seminar by Schiff last week, compared with about 20 who have attended previous seminars. Nena Norwood was among the San Diegans there.
“Like most people, I'm concerned about the dollar falling and what it will do to the economy,” Norwood said. “I want to protect my money. It makes a lot of sense to get out of the dollar and get into foreign currencies or in stocks on foreign exchanges.”
Norwood said she sees evidence of the dollar's decline every time she fills her gas tank or goes through a supermarket checkout line. She worries that the cost of the Iraq war and the expense of fixing the mortgage crisis will weaken the dollar further.
“When you look at a country like we are and ask where that money's coming from, it's scary,” Norwood said.
Michael Crespy of Encinitas, a partner in the DiscoveryWorks Legal, a litigation support firm, said he went to the Newport Beach seminar because he believes “the dollar's been a disaster. It has no place to go but down because the Fed has chosen to devalue it, printing more and more money to prop up asset values so that things don't look or appear as bad as they really are.”
Crespy said the Fed is doing the opposite of what it should be doing: raising interest rates.
“That would put the economy into a recession, but the economy needs to squeeze out all the excess that's been in it for years,” he said. “Ultimately, the economy will go into a recession one way or another. Right now, the Federal Reserve is only prolonging the pain.”
Everything is cyclical.
Yeaha, a collapsing currency is always the sign of a dynamic and growing economic superpower.
Just look at world beaters like Zimbabwe.
Yeah, I’ll run right out and invest in peso denominated investments.
That's a DITTO. Buy low sell high/sell high buy low
Petron Pizza in Texas is accepting pesos for payment. I wonder if that now makes good economic sense by currency exchange, instead of pandering to a population.
Everything is cyclical.
While in theory this is correct, but unfortunately it hasn't played out that way.
The US Dollar hit a high against the dollar index in 2002 at 1.24 and is now at .71. (see chart above, last one on the right)
Our trade deficit has gone from ~423 billion to over 700 billion during the same time period.
http://www.census.gov/foreign-trade/statistics/historical/gands.txt
One more thing that most folks do not realize is that the stock market measured by the Dow Jones industrial average has gone from ~8000 at the start of 2003 to over 13,000 which on the surface looks like a 60% total return.
You may in fact have 60% more cash in your pocket, however, when you go to spend that money it is worth substantially less.
There was a recent Wall Street Journal article about how the S & P 500 is actually break-even over the last ten years when you account for inflation.
The reality is, in constant dollars, you are buying less of everything from milk to oil and everything in between.
I would challenge anyone to go through their day without buying or using something that wasn't made in another country. Your blue jeans go through 6 or 7 different countries before we buy them here.
S&P was grossly overvalued along with all stocks 10 years ago so that’s not really a good measure. Except for oil/gas, most of the countries we buy from have not allowed the $ to drop that much vs it. The USD is only down about 15% against Asian currencies since 2002 for example. The USD was also overvalued in 2002. The $ dropping has hurt oil prices but the great majority of the reason for the increase is due to increased demand from China/India and elsewhere in the developing countries.
Oh the humanity!
Either way it doesn't matter since valuations are a relative thing. The only thing that matters is how much money you have at the end of the day.
The problem I have is that the so called Wall Street experts and advisors will continue to tell the public to buy and hope, I mean hold.
I'm not sure who your referring to when you say that “most countries we buy from” haven't allowed the dollar to drop. If your suggesting China, then you need to realize that the Chinese Yuan is PEGGED to the US dollar. The Dollar index in the chart above contains our largest trading partners that have a floating currency.
At some point those countries holding US Dollars will find it in their best interest to support the US Dollar or watch their dollar denominated assets lose more and more value.
So, when you do the math, since 2003 (after the bubble) the Dow is actually down over 30% in constant dollars (adjusted for inflation and deflation).
And again, the only thing that really matters is how many dollars you have AND what you can buy with them.
Don't forget that old economic powerhouse, the Weimar Republic.
Except with computers the FED is saved the cost of ink and paper. When you create money this quickly of course the dollar drops [remember these are growth rates of the money supply. M2 and M3 are growing much faster than GDP.
The Fed doesn't create M2 and M3.
I didn’t say it did.
Excellent. Glad I could help.
I don’t agree with your assessment that a weak dollar is good for our trade deficit. It is very bad for our trade deficit. We are a net importer of goods. The additional profits a weak dollar is producing from selling US goods overseas is MORE than offset by an increase in the cost of everything we import. Why do you think oil just hit $112 a barrel. This is a good example of a costly foreign product that is exacerbating the US trade deficit due to a weaker dollar. Sadly, you are dead wrong.
Great article. Gets right to the right point. Again, I don’t know if Bernanke’s intended cure of mass inflation to insure against asset deflation will work or not, or is needed or not. But he is hell bent on doing so and the downside risk to the currency is extreme and treacherous.
I hope we survive this unscathed. There are some very intelligent people here who already fear we won’t come out of this unscathed, but with a very weakened dollar and economy for a good long time to come.
Scary stuff.
Thanks for the ping for an interesting article.
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