Jump to content
Objectivism Online Forum
source

The Price of the Dollar

Rate this topic

Recommended Posts

I'm not sure where to ask this, so I'm asking here. If there is a more appropriate site or forum on this site to ask this, I'd like to know.

The value of the US Dollar has been dropping for some time now and I'm wondering if anyone has any knowledge of whether it is about to stop dropping (and start rising)?

The reason I'm asking is because I've been thinking of buying some foreign currency, since Croatia is near bankruptcy. The Dollar is now very low, which is why I'm interesting in buying it.

Also, I'd like to know where, if at all, I can find some charts concerning the values of other currencies on the internet.

If anyone's willing to help, I'd appreciate it.

Share this post


Link to post
Share on other sites
I'm not sure where to ask this, so I'm asking here. If there is a more appropriate site or forum on this site to ask this, I'd like to know.

Try http://www.austrianforum.com

Not that this isn't an approrpiate forum, or that you won't get an answer here, but I think you're more likely to get an answer there.

Share this post


Link to post
Share on other sites

...But if it helps any, everything I've read on the subject says that the dollar will continue its downward trend for the remainder of 2005. Although I don't have any sources to back that up, so I don't know how useful it will be to you.

Share this post


Link to post
Share on other sites

I would suggest that the opinions of most economists -- Austrian or otherwise -- should not be a key factor in your decision.

You could look to seasoned market players for advice. From my reading, I find that their opinions on the dollar are divided. Some big players have taken a short position on the dollar, citing the ever-growing trade deficit in the US. On the other hand, there are some that point to the fact that gold has already risen about 50% in dollar terms over the last three years or so (i.e. the dollar has fallen). Still others say that the dollar will fall, but not against all currencies -- for example, the dollar may fall against a basket of currencies or against gold, while rising against the Euro.

Since your objective is to hedge Croatian currency, I suggest that you diversify your non-Croatian holdings. (Not sure what the laws and the commissions are like in Croatia.) You could hold a mix of Gold, US$, Swiss Franc, Euro & Yen. All fairly strong currencies. If legally feasible you could buy very short term (why short term--that's another post) government bonds in the same currencies. So, for instance, you might be able to hold a US government bond that expires in 2 years and earn a couple of percent interest while holding it. Same for other currencies.

As for charts: this site has four years of historical data.. For older data (from 1990) this site offers some graphs, but is a bit tedious to use.

Share this post


Link to post
Share on other sites

Along with trade deficits, interest rates also factor in. The higher American interest rates go (the Fed Funds Rate) the more the dollar is worth relative to other currencies.

But, I agree that market players will know more about trading for dollars than anyone else. Currency trading seems very complicated, or whatever I remember from Macroecon 101 :)

Share this post


Link to post
Share on other sites
Along with trade deficits, interest rates also factor in.  The higher American interest rates go (the Fed Funds Rate) the more the dollar is worth relative to other currencies.

But, I agree that market players will know more about trading for dollars than anyone else.  Currency trading seems very complicated, or whatever I remember from Macroecon 101  B)

I'm not really going into trading. I just want the value I now have in Croatian currency to remain at least constant in regard to other currencies, should the country go bankrupt. If that happens, the prices may (or rather will) go up and what I have now although it can be called a lot, could be nothing when the prices start skyrocketing.

And when I'm already buying, why not buy a currency which is now at its lowest and then let it grow?

Share this post


Link to post
Share on other sites
In Croatia, can one just walk into a bank and buy US Dollars (at least up to a limit that most middle class individuals would find high) ?

What about foreign accounts when it comes to stocks -- e.g. investing in US stocks? Is that legal?

I don't know about stocks, but I can buy foreign currency. To my knowledge, there is no legal limit to how much foreign currency I can have.

Share this post


Link to post
Share on other sites

There are very very few people in the world who can know whether the value of a currency will rise or fall. Reason:

- The price of a currency (just like everything else) is determined by how much people value it now, and how they expect the price to change in the future. Lets say that the dollar is worth 1 euro today, but everyone knows that it will be worth only .5 euros next week. If that was the case, EVERYONE would try to sell their dollars today. BUT, if everyone knew that you could get a dollar for only .5 euros next week, no one would be willing to pay more than .5 euros today. If it is obvious that it is beneficial to sell dollars, why would anyone want to buy them?

In a free market, prices will be determined by supply and demand, meaning that prices will be at the point where there are equally many suppliers as demanders. People will only choose to trade if they believe they'll benefit, so that must mean that at the market price, there are always equally many people who believe that the dollar will lose value, as there are people who believe that the dollar will gain value.

The actual price of the dollar is not very relevant in this case, what matters is whether it will go up or down. The fact that it is historically low right now does not imply that it will go either up or down, because of what I said in the paragraph above.

However, there are a couple of reasons why you might want to concider buying dollars:

1. You expect that you'll suffer more from a collapse in your economy than the average demander of dollars. In this case, there will be people who are willing to take a greater risk than you are by holding your currency. This would be the case if you have some strong dependence with the US, for example if you have saved money to go to school here, or if you own a business that trades with the US.

2. You think you know more about the economic condition of your country than the average currency trader. We do not have perfect information in this world, especially not about governments who often are pretty unpredictable. People who trade currency may therefore base their decisions on wrong information, but it is probably not likely that we know more about what's going on than the professional traders have.

I've been a teaching assistant in an international finance class, but when people ask me what I expect to happen in the currency market, I have to admit that I have no idea!

Share this post


Link to post
Share on other sites

The price of US Dollar, as well as inflation, is indirectly, though accurately controlled through the reserve.

I cite my post here.

All this is not something that anyone should go around blabbing about. They are a very powerful organization.

Share this post


Link to post
Share on other sites
All this is not something that anyone should go around blabbing about. They are a very powerful organization.
Controlled by the Jewish bankers, no doubt. Or, do the modern conspiracies prefer to blame Saudi bankers?

Share this post


Link to post
Share on other sites

Out of curiosity, anyone care to share their opinion on what exactly will happen when the US dollar becomes worthless.

I thought that it would be great to some extent since the government would no longer be able to fund organizations such as the IRS. But then I thought the government will only use its gold reserves from Fort Knox, and who knows, they may even take every one else’s gold due to the “emergency.”

I honestly do not know what will happen, but I would like to have a discussion on different possibilities and maybe even find out how protect our freedoms when the situation does arise.

Share this post


Link to post
Share on other sites

I don't think the currency could ever be truely worthless. Sure we could (hypothetically) have 1000% annual inflation, but that is still a long way from being worthless.

The government wouldn't have to lessen its activities much at all.

Share this post


Link to post
Share on other sites
I don't think the currency could ever be truely worthless. Sure we could (hypothetically) have 1000% annual inflation, but that is still a long way from being worthless.

1000% inflation rate, wouldn't that make the currency practically worthless?

Share this post


Link to post
Share on other sites
Out of curiosity, anyone care to share their opinion on what exactly will happen when the US dollar becomes worthless.
You say "when" rather than "if". Do you assume that the dollar will become worthless? In your lifetime? If so, what is the basis for this judgement?

Share this post


Link to post
Share on other sites

This is an assumption based on the nature of the Federal Reserve System.

I got ahead of myself when I said “when” instead of “if.” For this I apologize, especially if I wasted anyone’s time.

If the United States government starts backing its money with a gold standard, then it is a possibility that the hyperinflation scenario will not occur. But since I do not think that the United States government will change its practices, I expect trouble for the economy in the future.

Share this post


Link to post
Share on other sites

By "hyperinflation", I assume that you mean inflation of the order of 50% per year or even much worse.

History of the Fed: The Fed has been in existence since 1913 and the US went off the gold standard somewhere around 1935, but retained some form of it in allowing gold-covertibility to foreign banks. This too was ended in 1971.

History of the gold price: In 1935, $35/ounce. In 1971, $44/ounce. Today (2005), $445 an ounce.

Inflation: If one takes the "price of a dollar", in terms of gold, one would find that it has lost value at less than 8% per year between 1971 and 2005. However, in 1980, gold almost hit $900 an ounce. So, if one takes the period 1971-80, one finds the dollar declining @ about 35% per annum in terms of gold. Ofcourse, one then has the value of the dollar rising, not falling, between 1980 and today.

Recent History: If you take more recent history, you will see that the price of the dollar has been virtually steady (in gold terms) since about 1990, with a slight rise in the late 1990's/early 2000's.

Relevance of the Gold Price: The price of gold does not reflect the contemporaneous value of the dollar in terms of other commodities. It is predictive of the long-term value of the dollar. So, for instance, in 1980, the huge decline in the dollar's value in terms of gold, did not reflect a similar decline in the dollar's value in terms of other goods (CPI for 1979 was 11%, for 1980 it was 13.5%). The relatively higher jump in the price of gold reflected deteriorating inflation expectations for the future.

Gold thus acts as an indicator of "the market's" longer-term inflation expectations and therefore will react sharply if the market perceives a substantially changed future. Ofcourse, in the 1980's case, the market was wrong. The US corrected many of its prior economic misdeeds in the area of money-supply, and gold came back to under $500 an ounce. Similarly, the strong dollar of the late 1990's/early 2000's reflected the market's unrealistic expectations that economic nivana was around the corner: that the stock market would go sky high, and inflation had been wiped off the face of the earth!

Money Supply: What if one uses money supply as an indicator of inflation? After all "inflation" originally simply meant that: inflation of the money-supply. In 1971, M1 was $215, and M3 was $685 (billions). Today (2005), M1 is 1360 and M3 is 9570. So, M1 grew at 6% per year, while M3 grew at a little over 8%. However, if you look at the past 10 years, you find that M1 grew at under 2% per annum while M3 grew at 8%.

From all this historical data, I cannot find any evidence that the dollar is heading significantly lower. Also, the Fed is not doing anything significantly differewnt from the past. It does do some things better: for one, it places a higher importance on price level control than it used to in the 60's and 70's and it keeps the market informed about its next few moves, so that there are few surprises.

If you have any reason to believe that the US is heading toward hyperinflation, I'd be curious to understand what it is.

Share this post


Link to post
Share on other sites
If the United States government starts backing its money with a gold standard, then it is a possibility that the hyperinflation scenario will not occur.

More important than the gold standard or Federal Reserve System policy is whether the Congress continues to run large budget deficits. Surpluses would make the dollar stronger. Deficits make it weaker.

History of the gold price: In 1935, $35/ounce. In 1971, $44/ounce. Today (2005), $445 an ounce.

I think that originally the dollar was set at one twentieth of a troy ounce of gold, i.e. a gold price of $20/ounce.

Share this post


Link to post
Share on other sites
More important than the gold standard or Federal Reserve System policy is whether the Congress continues to run large budget deficits.  Surpluses would make the dollar stronger.  Deficits make it weaker.

That's the whole point of having a gold standard. Once the dollar is backed by a precious metal, the government will no longer be able to aribitrarily inflate the supply of money to cover deficit spending. The gold standard keeps Congress honest.

Share this post


Link to post
Share on other sites
That's the whole point of having a gold standard.  Once the dollar is backed by a precious metal, the government will no longer be able to aribitrarily inflate the supply of money to cover deficit spending.  The gold standard keeps Congress honest.

But the ratio at which the dollar is backed by the whatever-it-be can be changed at a whim to adjust the supply of currency to "fit" current "needs". It was done before so often then they flipped over to different standard ie silver dollars vs. gold dollars it all became pointless and we switched to the fiat currency standard. And you can bet if they did it today, that it would end up being "the people" ie congress that had a say over the ratio and not the Fed. People forget that Rep Henry Gonzalez did a pretty good job in the 80's of trying to wrestle control of the Fed away from the Fed and into the hands of Congress. Of course he failed but he made some scary inroads and had very widespread support of both sides of the aisle.

Changing to a commodity ratio based currency doesn't mean that they can't issue new currency, just that they can monkey with the ratios. And don't think they won't do again. If anything, it will increase the amount of volatility of the USD since it would be beholden to an asset primarily held by South Africa and Russia, which in and of itself is a volatile asset. Add the need to hedge USD based contracts against inflation etc and you would see some righteous volatility. Especially since so many other nations use us as the "gold standard" to hedge against when it comes to contracts regardless of what the Euro traders will tell you.

Share this post


Link to post
Share on other sites
But the ratio at which the dollar is backed by the whatever-it-be can be changed at a whim to adjust the supply of currency to "fit" current "needs".

So if I have a gold coin in my pocket that says $50, how is the government going to take gold out of that coin to make it worth less?

Share this post


Link to post
Share on other sites
So if I have a gold coin in my pocket that says $50, how is the government going to take gold out of that coin to make it worth less?

Nope, it's worth $50.00 still. Just like the paper that says $1.00 is still worth $1.00. But you are actually looking at different issues than what I was addressing. I was discussing the difference between currency backed by some pretty shiny metals versus ones actually made out of it.

Ones actually made out of it have two separate and entirely different values. An intrinsic and explicit value. A $50.00 coin made from gold is worth exactly as much as a $50.00 coin made from copper when it comes to the face value. But, since it's a pretty shiny metal that lots of people like and is hard to come by, then people will generally give you more for it. It's the same reason that the American Eagles cost and arm and a leg because they are gold etc but still are technically worth nothing more than their face value. So it has an intrinsic value that is greater than its face value. Though walk into a store and try to spend that coin and get the "real" value of the coin. It won't happen.

When people discuss the gold standard as I was, it has to do with a currency that represents a currency that is "exchangable" for a given amount. In theory I could go up to Fort Knox and hand X number of $ bills and be given X ounces of shiny metals. This is supposedly the magical "inflationproof" currency that people point to. Generally people mean that each note represents 1/350th (or whatever amount) an ounce of gold and given that the treasury has a specific amount of gold, they can't go an issue new currency. Therefore, no more inflation. QED.

But, as I pointed out in my post, in every single occurrence of a commodity backed currency the government just adjusted the ratios to fit their macro models. Of course, all macro models are flawed and doomed to fail.

And in the instances where coins (which people hate carrying even more than cash hence and even checks which are all quickly being replaced by debit cards) are actually made out of gold/silver/etc, governments have always just jerked around the purity levels of the coins. Sure, you can insist on keeping your higher purity coins but then you can't spend or deposit them since they'll be replaced by the newer versions. It happened in 1965 with quarters. Can't remember what year they did it with dimes.

Share this post


Link to post
Share on other sites
More important than the gold standard or Federal Reserve System policy is whether the Congress continues to run large budget deficits.  Surpluses would make the dollar stronger.  Deficits make it weaker.

The Congressman have been put in place by the bankers, they are part of the system. You cannot expect a centralized entity to be able to maintain a gold and silver standard without infiltration from the central banking money power. Please see The Coming Battle-A History of Central Banking

You'll need a banking structure that's completely decentralized and redundant.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

×
×
  • Create New...