Today’s financial news headlines are screaming about the US Dollar’s price decline. “The dollar makes new lows” can be heard just about every hour on the business news channels. Like everything else these days it sounds sensational. Let’s take a look to see whether we should be alarmed or not.
The Gold Standard
Since our founding, the USA had set a fixed price valuing the Dollar against the price of Gold. Under the “Gold Standard” people trusted the Dollar because they knew that they could redeem their paper money at the bank at any time for a fixed price in Gold. Pretty simple: “Take my dollars back and pay me their value in gold!”
In 1971 President Richard Nixon abolished the Gold Standard and replaced it with the system that we have in place today. – http://www.history.com/this-day-in-history/fdr-takes-united-states-off-gold-standard – President Nixon said that rather than backing up the Dollar with Gold, the Dollar would now be backed up by “The full faith and credit of the United States of America.” In other words, you had better believe in the USA because you are not getting paid back with gold at $35 per ounce. The rest of the world followed our lead. The genie was out of the bottle.
With gold out of the picture, the Dollar was on its own as a free floating currency that was traded against other currencies at currency exchanges around the world. The value of the Dollar was pitted against the value of every other currency in the world. Thus, the value of the Dollar depended upon what currency the Dollar was being compared to. Examples are the Dollar against the Japanese Yen or the Dollar against the British Pound. The only way to see who was winning each battle was to figure out which Nation was the best at keeping its household finances in order.
Here are some of the ways currency traders keep score:
1 – Is your nation’s economy strong compared to other nations?
2 – How is your budget doing? Do you owe money because of a budget deficit or trade deficit?
3 – Do you have inflation?
4 – How is your government doing? Are you in good standing with your world neighbors or are you a pariah like Venezuela, North Korea or Iran?
So if you are viewed as a solid world citizen, your currency is strong and visa versa if you are not.
Here is a long term chart that shows how the Dollar is doing:
As one can see, the Dollar as measured against a basket of foreign currencies has had many wild swings since 2007. Since January 2017 it has been falling hard. However, in the long term picture, the Dollar is just below the middle of the range it has traded in since the financial crises of 2007. Thus, the big picture shows just another down move within a long term roller coaster ride.
So what’s the bottom Line?
The answer is not much so far. The cost of traveling overseas may be a bit higher. Same with the cost of buying foreign products. But we are living in a technological revolution where the prices that we pay for everyday items are declining. Just look no further than Amazon’s purchase of Whole Foods which caused all supermarkets to cut prices in order to compete.
If one looks at the American things that we buy, the value of the Dollar means nothing. Healthcare costs are still a problem. Medicare & Social Security (for younger seniors) are being still being squeezed despite the Dollar. Most folks don’t care about the price of imported French foie gras or truffles.
Grading the Dollar Using the above test:
1 – The USA is still the strongest most trustworthy country in the world compared to other countries even as untrustworthy China rises. A huge plus.
2 – Our Budget is not doing well. The USA must deal with our growing budget deficit and trade deficit. If we keep on spending more than we can afford, it can’t be good for the Dollar. The recent tax cut is bad for the Dollar. The currency markets believe we are irresponsible spenders. The saving grace here is that other countries are behaving just as irresponsibly. A minus.
3 – The USA has no inflation yet as measured by the poorly constructed Consumer Price Index. But we do have asset price inflation and healthcare cost inflation. A neutral.
4 – Our government is not doing as well as in the past because many nations view President Trump’s behavior as unsettling to their long term view of the USA as a solid world citizen. I think that this may be the main reason for the recent dollar instability. A minus.
In sum, there are reasons for the Dollar to be weak for now. But the long term picture is not terrible. The effect on seniors is nonexistent so far. Not to worry.