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Original Message
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The turn of the year saw a rapid decline in the value of the American dollar as international confidence in the United States and its currency declined. What is the meaning of this for Americans, and what does it portend for the future?
by Melvin Rhodes
Americans have long thought that they are the wealthiest nation on earth. Individually, Americans believe they are better off than they would be anywhere else.
But is this the case?
I have five brothers living in England. Four of them annually visit other countries, something that few Americans can afford to do. Three of them have visited the United States.
Additionally, they have all had HDTVs for some time, a quality of picture still lacking in my home. They and their families all eat out as much as people do on this side of the Atlantic. They also all seem to have the latest vehicles, albeit usually smaller than those in the United States, perhaps reflecting the fact that parking spaces are few and far between!
It's not difficult to see why they are doing so well. Just take a look at the currency markets: The dollar has fallen over 15 percent in a few weeks. It now takes two U.S. dollars to buy one British pound. In fact, with commission and charges, it will cost you more than that to convert greenbacks into British notes in any bank.
So now, in dollar terms, my brothers are getting almost twice as much value for their pounds as they did 20 years ago when the pound and the dollar were almost at par.
Inflation in real estate
Another reason they are doing well is real estate inflation. With a much higher population density than the United States, and with limited space, house prices in the United Kingdom have shot up, so that now any British homeowner is among the richest people in the Western world.
We visited a couple of friends in London a couple of years ago. Their home was then worth 540,000 British pounds, at the time almost $1 million. Yet it was a small dwelling with very cramped rooms and no garage. Also, the home was a terraced house, meaning it was in a street full of homes with no gaps (or garages) between them. Parking was a constant nightmare as everybody had to park on the street. Sometimes they had to park on another street! (No wonder people have smaller cars!) If this couple sold their home in London, they could move to the U.S. Midwest, buy a bigger home for $150,000 and deposit the balance in the bank, living off the interest for the rest of their lives!
In 1984 my wife and I were living in the United Kingdom. We bought a home there for 38,000 pounds. At the time the pound was worth $1.04, so the house cost $39,500. I've recently been told that the home is now worth 400,000 British pounds, an increase of over 1,000 percent in 20 years. That's 1,000 percent in British pounds. In dollars, it's gone up twice as much, 2,000 percent or $800,000! Unfortunately, we sold it less than a year after we bought it, when we were transferred.
It's not surprising that when British people retire, they sell their homes and often move to cheaper countries, living off the nontaxable proceeds!
The dollar's decline in value is one of the most significant developments of our time, yet goes barely reported in the United States. Most Americans remain oblivious. Television programs and newspaper articles will boast that the U.S. economy is growing at a greater rate than many other countries, but if the currency is falling, America is still going backwards financially.
If, for example, in 2005, an American's salary was $50,000 and, in 2006, he or she received a 5 percent increase, the salary would be $52,500. However, a year ago that $50,000 was worth 27,700 British pounds. Today, with the 5 percent increase, the salary has actually gone down to 26,250 pounds, courtesy of the dollar's decline. In comparison to the euro, the value has decreased even more.
This is also happening to the U.S. national economy. An annual growth rate of 5 percent means roughly 10 percent negative growth, because the dollar has declined internationally by 15 percent.
Does the dollar's decline matter?
Clearly, if this is nonnews to most people in the media, it's not having much of an effect upon Americans. So should Americans worry?
The reason a decline in the value of the U.S. currency is having little effect at this time is due to two things that work in America's favor. The first is that the United States produces most of its own food, which keeps the price of food stable.
Secondly, oil and most commodities are priced in dollars—for now. There was a time when most commodities were priced in sterling, the British currency. But as sterling weakened and became an unpredictable currency (meaning it might not hold its value), individuals and nations switched to U.S. dollars.
Now they are gradually switching to euros, arguably today the world's most sought-after currency.
Does it matter?
The primary reason a currency falls in value against other currencies is a lack of confidence. Central bankers and eventually ordinary people will get rid of their dollars because they fear its value will decline. As more and more banks divest themselves of their dollar assets, even more people will want to get rid of theirs. This will drive the value down, in the same way that a glut of tomatoes will drive down the price.
There are a number of reasons international confidence in the U.S. currency has declined, some political and some financial.
[link to biz.yahoo.com]
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