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.”
Pity those geniuses who trade 'em in for euros here.
When the European Central Banks finally start lowering rates, the Euro will drop against the dollar. They’ve been holding off and holding off, trying to protect their exports, but it can’t go on much longer.
I think the dollar will probably end up about 1.30 per Euro. Maybe even less, depending on how much turmoil happens in Europe.
I see ALOT fewer tourists going to European nations.
why do I feel this article was written by a currency trader who is looking to dump his loses are newbies.
seriously, we see those get rich quick gold and real estate commercials now.
$112 per barrel oil might just save us from the "climate change" hucksters.
I would much rather have a market solution than a global bureaucratic solution to the perception that we consume too much foreign oil.
High gas prices are already causing people to ditch their gas-guzzlers for cars that get better mileage. Just take a look at your local craigslist car listings. There are some great deals on SUVs right now, and it's because of rising gas prices.
This will decrease our demand for gas, and possibly block the United Nations from getting their global AGW tax that they want so badly.
Once the United Nations has global taxing authority, US sovereignty's days are numbered.
WOW! A blast from the past.... I used to joke that 'undoing' the mergers and reporting profits of 5 Bil instead of 10 Bil would 'lessen' the headline BS re profits and perhaps make reporters look elsewhere for 'obscene profits'.....think it would help? LOL....
No mistake on my part.
I thought I explained it pretty well, however next time I’ll have to keep in mind who made be reading this.
Thanks,
If the Euro doubles in value in relation to the dollar, that does not mean our market is worth half as much. Sorry.
I thought I explained it pretty well, however next time I’ll have to keep in mind who made be reading this.
That's a good idea. Someone who knows the difference between foreign exchange and inflation might correct you again, if you post the same mistake.
Dude
You have no clue.
see ya
See ya!
Try to live one day without buying or using something that was made outside of this country.
I did not equate inflation with currency fluctuations.
Then why add them together in post #33?
Take the Dow at 8500 in 2003 times the value of the dollar against the trade weighted index (see chart in OP) 1.24 equals 10540.
With the Dow currently around 12500 times the dollar at .71 equals 8875.
So, with inflation adjustments we are going to be down about 30%.
If you adjust for inflation, we're up since 2003. If you adjust for foreign currency, (unless you bought with those currencies, why adjust?) we're down.
Why add them together, unless you were confused?
Dumb post of the month award
Filled up at $3.109 this morning, but diesel was at $4.089. I’ve never seen a $1.00 gap before.
I added them together because inflation and the value of the dollar against the trade weighted index are two different things that effect your buying power.
It’s clear, the confusion is on your end.
Inflation is not the same thing as foreign exchange rate. And FYI the Asian markets are somewhat loosely pegged to the dollar. The Yuan has risen about 18% since 2004. The real purchasing power of a US Citizen is not down 50% since 2003 regardless of what the USD index says. The only thing up that much would be gasoline.
I NEVER said US purchasing power was down 50%.
It's down approx. 30%.
Yes, you are correct about the Yuan in one sense, but it's more accurate to say that it's loosely traded and strongly pegged as a result of agreements between both governments.
I never said inflation was up 30% from 03 to 08.
The dollar is DOWN over 30% from 03 to today.
The only reason the FED has been cutting rates is to rescue the banks and to help folks refinance out of adjustable rates mortgages. Those lower rates have added fuel to the declining dollar. Meanwhile, it has not stopped inflation.
The easiest way out of this mess is for the US to launch an aggressive program of oil recovery, and I mean NOW !!
Oil is the greatest factor driving costs in our economy.
The dollar could very well be at a bottom, I closed my EUR/USD long position after the Bear Sterns mess. If there are more shoes to drop in this credit crisis the bottom has yet to be seen.
The next shoe to drop in the credit crises will be the housing deflation in Europe imo.
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