The Devaluation of the US Dollar

Back before 9/11 I traveled to Australia and it was a great trip. That country is amazing although I proved unable to consistently drive on the other side of the road. One item I remember clearly is that the Australians seemed to treat $50 Australian currency as if it were more like a $20 US currency item. They would get $50 Australian notes out of the ATM machines and frequently use them to purchase beer or other items at the bar. This is exaggerating a bit but not by a lot.

As you can see from this graph the US Dollar was worth almost twice as much as an Australian dollar at the time (around 2000) so this makes sense. Taking out a $20 Australian from the ATM wouldn’t buy you much if it was worth around $10 USD, so why not dispense $50 Australian instead?

Today the Australian dollar is roughly on par with the US dollar. Our currency has depreciated roughly 50% against the Australian currency over the last decade. That is an amazing slide.

While slightly tongue-in-cheek it isn’t too much of a stretch to think that this ATM I saw recently in Chicago is preparing for the continuous devaluation of the US dollar; someday instead of getting $20 USD out of the ATM you may get $100 instead; more likely we would go down the Australian route and start making $50 USD bills ubiquitous.

It is absolutely important to think about the impacts of the declining USD. I am not a currency expert and not talking about the policy changes that led us to this path but about the practical impact on ordinary Americans far removed from these sorts of currency gyrations.

In the grand scheme, if you are buying something and competing against the Australians (or Canadians, or Chinese, or someone with a Euro) you are going to have to pay a lot more US currency to buy that same item. Michigan Avenue in Chicago is swarming with tourists right now and I am sure a lot of them are buying up goods that seem like a huge bargain to them, paying in these foreign currencies. Dan and I were recently in a mall in San Francisco that was absolutely packed to the gills with people of Asian descent buying like there is no tomorrow. Why is this? Because their currency goes a lot further in the US than it does in their home countries.

Things that are denominated in dollars like oil, gold and US grains are soaring. There are many other reasons (such as the war in Libya) but in general if you price something in dollars and the dollar goes down in value the price goes up. If you own these commodities (or something that produces these commodities, like farmland) then you are going to make a lot of money.

On the other hand, expect foreigners to come here and snap up US dollar denominated assets like real estate and even whole companies since valuations are attractive to them. While this isn’t always a bad thing (it probably is going to bail out Florida real estate and suck up all those condos on the market, as well as California) don’t plan on winning a bidding war against a foreigner when your currency has lost half its value. This is just simple math.

Soon you will see ATM’s start to kick out $50 bills or maybe we will just jump to $100 bills. This is the wave of the future. And soon the Australians will come to the US and be confused about this, just like I was back before 9/11 on my trip to Australia.

Cross posted at Trust Funds for Kids

8 thoughts on “The Devaluation of the US Dollar”

  1. The current exchange rate is USD $1.098 / AUD $1.000. So it’s not just on par, it’s worth almost 10% more.

    I think the reason is simple.. the US economy has been mismanaged (interest rates kept too low for too long, too much spending, printing money etc) while the Australian economy has mostly been left alone by government until the last couple of years (and our left wingers are pikers compared to yours, they actually pretend to be interested in balancing the budget although they always seem to fall far short…).

    This could change pretty rapidly if you manage to vote in someone with fiscal sanity but I won’t hold my breath. When the Republicans and Democrats are fighting over whether they are going to bail one or two buckets of water out of the sinking ship and the people who are actually arguing about making real cuts where they are needed are considered to be “off the reservation” then you’re in real trouble

  2. I have Australian friends who come here every year on shopping trips and have for 25 years. A lot of it is Australian tariff policy as certain things here have been far cheaper for a long time. The dollar’s fall has been going on for 50 years but just accelerated. I sure wish I had bought gold in 2000.

  3. Expanding the money supply faster than the economy grows creates inflation. The Continental Congress spent huge sums to finance the Revolution. The money they printed became worthless before the war ended.

    Historically: France, Germany, Italy, Brazil, Chile and Argentina have vastly expanded the money supply faster than their economies grew. And their money became worthless. Normally speculators were blamed.

    Zimbabwe used to heve the strongest currency in Africa. The Progressives inflated the currency and a 1 billion dollar note won’t buy a cup of coffe.

    Soon Progressives will turn the American dolars into zimbabwe money. The national debt will be paid with pocket change. No one will have a mortgage or any credit. And a trillion dollars won’t buy a grocery cart full of food. Silver coins will be useful if they are pure. Currently a silver dollar is worth $41.00.

  4. Here in California, what houses do trade hands are often foreign buyers laying down all cash.

    While our prices might fall further, the foreign buyers have hedged their dollar holdings with real assets.

  5. My daughter just sold her house in Melbourne, FL. In her little development, there were a number of houses vacant for one reason or another. Last month she told me that “Asians” had bought her house, as well as all the others for sale in the development.

  6. Everything’s cyclical.

    It’s just like the last last time this happened, when the Japanese economy was cruising past our stalled-out system, the yen’s value relative to the dollar’s was climbing, and Japanese investors, looking to grab undervalued assets with all of their surplus funds, bought up piles and piles of overpriced commercial real estate all over the United States.

    And then they lost their shirts and we got all or most of the real estate back in American hands for pennies on the dollar. In essence, the cycle helped us to harvest some of the excess value from Japan.

  7. bobby b Says:
    May 3rd, 2011 at 5:14 pm
    “Japan …bought up piles and piles of overpriced commercial real estate all over the United States.”

    But. Today, are commercial and residential real estate overpriced? Or, are we selling low-priced sky scrapers for pennies on the dollar? The shoe may be on the other foot.


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