What's the historic trend on dollar weakness?
I have noticed chatter of late, including in various comment thread here at OTB, about the decline of the dollar, including charges that the current administration’s policies are the problem. While it may well be that there are policies of this nature currently in play, it struck me as as read some of the aforementioned chatter that the decline of the dollar is hardly new.
Indeed, Barry Ritholtz has a chart that well illustrates this fact:
I do not have the technical expertise to analyze the reasons behind the trend. However, I can read charts well enough (and have enough of a sense of history) to recognize that whatever the situation is with the dollar, it is not a new phenomenon.
I will further note that there are those who favor a weaker dollar, as it makes our exports cheaper.* Dollar devaluation also means foreign-held US government debt is cheaper to repay.
Regardless of any of the issue of goodness/badness or the ever popular blame game, I will say this: the above chart should be taken into account when any claims are made about the state of the dollar. Consider it part of ongoing crusade to assert that facts and stuff are nice when arguments are being made.
*Yes, that originally said “imports” (a simple typo and nothing more).
Seems that the decline coincides rather well with the profligate spending begun under Bush and doubled down (or tripled down) under Obama, with a hearty huzzah for all the Congresses that aided and abetted the fiscal irresponsibility.
Perhaps the change in focus from creating wealth to redistributing it is taking its toll.
Wait, how would imports be cheaper if our dollar index declines? Imports should be more expensive, since an item that costs 100 euros used to cost us under 100 dollars, and now it costs 140 dollars. It is EXports that will be cheaper to the rest of the world, so we may very well see an increase in exports, which is the positive you are probably thinking of.
The best way to gauge the decline of the dollar is to look at the price of gold. The gold supply is finite and stable. Instead of saying gold is worth so many dollars an ounce, think of the amount of dollars it takes to buy a single once of gold, As the worth of the dollar declines, it takes more and more of them to buy a single ounce. It is hard to find a chart with gold as the baseline.
I believe you have that backwards. A weaker dollar makes our exports cheaper but raises the cost of imports. Still it doesn’t change your premise that a weaker dollar has some good features.
One downside is that while some imports by not rise in price due to increased productivity in the exporting country, commodities, such as oil, rise in dollar price due to the weaker dollar. A double whammy of sorts as the increased productivity elsewhere increases their use of oil, which along with the weaker dollar shows up at the pump as higher gas prices.
As with all things in the economy there are no absolutes, one man’s crashing dollar causing price inflation in his imports is another man’s increased domestic exports.
Charles, the way I read that graph is that under Obama it has stabilized compared to the Bush years, so that Obama’s “tripled down” seems to have had the exact opposite effect you think it did.
What is the unit on the vertical axis of this graph? It’s hard to interpret without knowing what the dollar is declining relative to.
My guess is that the vertical axis represents the Euro.
The y-axis is the Dollar Index, an index measuring the dollar against a bunch of foreign currencies, not just the Euro (though the Euro has the biggest weight, more than 50%). The currencies are the Euro, the Pound, the Canadian Dollar, the Swedish Krona, the Swiss Franc and the Yen. If you just measured against one currency (like the Euro) or one product (like gold), you could never be sure whether the dollar was actually weakening or if it was the other currency getting stronger or demand for the product was increasing. The only way to do this is to use an index of a bunch of stuff. That is to say, whoever said earlier in the thread that you should just use gold is a complete moron. Yeah, the supply of gold is stable, but demand for it is not, and it makes for a useless indicator of dollar strength.
I agree the decline appears to have stopped. But the way the chart is fluctuating up and down, I don’t think “stabilized” would be the right word to use.
in re: exports v. imports. That is a typo on my part–I have now fixed it.
Of course the demand for gold changes. The dollar declines, the demand for gold goes up. Strengthen the dollar and demand for gold drops
Of course, gold only has value because we say it has value. Kinda like the dollar and other stores of value.
I’m glad to hear someone finally say this. I hear people argue that gold will have value if the world economy crumples, and I wonder, “In what universe?”
Imagine trying to exchange gold for water in a barter economy. Doesn’t make sense to me, which is why I invest in bullets. Liquid AND useful.
SH, I’ll try to take this slowly. Your theory only holds if dollars are the _only_ thing anyone uses to buy gold. If anyone, anywhere besides US-dollar using Americans buys or sells gold, your idea is meaningless.
You cannot look at a chart like this without putting it in the context of …
1) Dot-com bubble bust and crash
2) Post 9/11 equity and asset crash
3) Real Estate bubble bust and crash
…all of which transpired in this timeframe. In all cases the political knee-jerk reaction to these dislocations from the executive, congress, treasury and the fed is to devalue the dollar to provide liquidity and in the hope of seeing Keynesian deficit stimulus in the economy. Whether you agree with Keynesian dogma or not, it is undeniable that our leadership does.
Even if virtually identical policies fueled the burst bubbles that created the pain, we use those same policies in bigger doses to feel better as we careen from one crisis to the next. The drug addiction analogy is apt.
Like with any addiction, it takes bigger and bigger doses to get the same high. And like any addiction, the process is self-correcting – one way or the other.
In a world filled with constantly changing currency values because of the vagaries of the issuers, gold is the most constant “store of value.” It is like a “Polaris,” or North Star, the one store of value around which everybody on Earth could base other stores of value. So I believe it is worth using in terms of evaluating one’s assets; be it currencies or commodities. Even the Fed could do a better job of managing the money supply by simply watching the dollar price of gold; gold increases in dollar price which means the dollar is decreasing in value relative to gold, so tighten the money supply to make the dollar more valuable. The opposite is obvious. Perhaps the Fed does this along with its other arcane valuations.
Of course the grand irony of this conversation about gold is that we know that gold is valuable because it currently costs…wait for it…lots of dollars.
How many ounces of gold did it take to buy an iPad in say 1990? Or a DVD? A cell phone? A digital camera? A laptop computer? Technology keeps changing, and with it the ratio of what people want to spend their money on.
A thousand dollars today can buy things that would have cost millions of dollars (if they were even technologically feasible) in 1990.
Isn’t the question really how many dollars it takes for a given standard of living, and I suppose, the distribution of those dollars among the population?
“Dollar devaluation also means foreign-held US government debt is cheaper to repay.”
Why would that be?
Doesn’t the government have to pay off its debt in dollars no matter who holds it?
What is a dollar worth? It’s value is constantly changing from many directions. Isn’t it at least important to know what it is worth in relation to an element that is regarded as the primary store of value?
Steven, here is one more snippet for you to consider:
I have an easy solution. Let’s draw the big red line between 1999 and 2009. Then we have a much less frightening decline.
Gee we print dollars to pay off debts that were borrowed when there were a lot less dollars out there, why would that make it cheaper to pay off the debt? No clue really no clue. mpw
re: dollar devaluation making debt repayment cheaper:
If you owe X amount of dollars denominated at a time when dollar value = 100% (baseline), if the dollar loses 10% of its value then paying the debt in the same amount of dollars is a discount. You’re paying in equivalent amounts on paper but less in terms of actual value.
It’s like perishable food in a way. If you promised someone a piece of cake in exchange for something, then you’re providing different value if it’s fresh than if it’s days old leftover.
“You’re paying in equivalent amounts on paper but less in terms of actual value.”
The foreigners holding our dollar denominated debts are indeed losing money when the dollar is devalued, but how does that make it cheaper for the U.S. government to pay it to them?
It’s not like the U.S. government is holding huge reserves of foreign currency that they can use to buy discounted dollars from a third party to pay off its debts with.
ponce they print the dollars like toilet paper, which is what they essentially are worth. The Treasury issues bonds for cash, the Fed buys the bonds with cash it just printed and poof you have more cash to pay debts or to piss away. They just have a nifty new name for it “Quantitative Easing” version 1.0 and 2.0 and possibly 3.0, but by then who is counting. mpw
SH: the operative words are “compared to the Bush years”. The Obama years (indeed, starting one year before Obama) look like the normal fluctuations of a a market in flux.
Empires rise and fall, but gold has always had value since the dawn of civilization and always will.
Serious question: Why?
Before you respond, I should disclose that I’m not a fan of central banking either.
Yeah, I think gold is the next bubble. It’s got relatively few actual uses, and is almost entirely by people who don’t really want gold but think they can sell it to other people who also don’t want gold for a lot of money.
Bingo. People don’t want the gold. They want to make money off of the gold.
Gold only has value as long as it is accepted as an intermediate store of value. You can’t eat gold, so having gold is only valuable as long as someone with food will accept it in exchange for some of their food. They will only take gold if someone else will accept it for say a tool of some kind. And so on and so on. If for some reason, gold were to become difficult to exchange, i.e., illiquid, then its value will decline in the face of a breakdown of the market for goods and services.
“Yeah, I think gold is the next bubble. It’s got relatively few actual uses,”
Besides the fact that there’s gold in every single electronic device in use today, of course.
“The Treasury issues bonds for cash, the Fed buys the bonds with cash it just printed and poof you have more cash to pay debts or to piss away. ”
Even if that were true, it doesn’t explain why it’s now cheaper for the U.S. government to pay off its dollar denominated debts.
Devalued dollars just means it is more for the government to borrow money in the future.
@ponce: yes, gold has some practical uses, but that is not the reason that the price has soared.
I would note along those lines that we saw a gold surge in the late 70s/early 80s for similar reasons (i.e., recession and inflation concerns), and after that surge it lost about half it value in a rapid decline once the economy recovered from recession and people stopped panicking.
And it should give one pause, at a minimum, that the current proponents of gold investment tend to be talk show hosts as opposed to people who actually know something about the economy.
“I would note along those lines that we saw a gold surge in the late 70s/early 80s for similar reasons ”
Yep, I’m embarrassed to admit that, good Reaganite that I was back then, I rode a wad of Krugerrands up the speculative bubble.
And, interestingly, the line fits the data as well as the line that’s on the present graph (since it goes throught the 2004 decline which the present line does not).
Actually from an engineering (electrical) point of view, gold has many very useful characteristics … excellent conductor, extremely malleable, non-corrosive.
Meant non-corroding. Sorry.
ponce go back to econ 101 not imaginary economics for dems, “even if it was true”, for fu45s sake look at what the feds balance sheet is, they hold more treasuries than almost anyone else (don’t call on me to prove it because you are the ignorant one, learn something and look it up). Second, they print the dollars out of thin air, you know that part where the Treasury issues the debt and Fed buys it, I know that may be hard for a socialist to grasp but hey I tried..
As to gold rallying through the late 70’s that wouldn’t have had anything to do with the last dem who was a dipshit on the economy, you know Carter, mister triple double (double digit inflation, unemployment and interest rates) which were all devaluing the $ and making gold more expensive vs the rapidly devaluing $. It is funny how a strong dollar is brought about by an expanding economy and a weak dollar is brought about by a stagnant economy. Maybe dems should learn something from that.
Well, Barry Ritholtz explains it all here.
mpw — Since you now believe that your dollars are nothing but toilet paper, I will happily take them off your hands. I will pay in Euros, if you prefer. For every fifty of your worthless American dollars, I will give you one Euro. I’m sure you will have no problems with this deal.
By the way, thanks for reminding me that Carter created the inflation in the 1970s. Pretty clever of Gerry Ford to print up all those WIN buttons to fight a problem that wouldn’t start until after he left office.
wr thinks he is an astute trader, he shows he thinks the $ is shit, offering 50 to the euro. wr sell me some gold for those great dollars maybe $1250 an ounce, then we will talk. The euro is in the same boat as we are with more players and less restraint. Since most here think gold is an overvalued scrap metal maybe you should short it, with all your astute trading knowledge. Good luck with that idea. mpw
It seems like I see a conspiracy here. And everyone is in on the game. And that is a One World Order. We were told years ago that we were going to be an information society. That we did not need manufacturing. And in the background with all the workings of all the economists and all the pundits, they decided to give up one third of our manufacturing. Their figuring at that time as we hear today is that we will build the high end stuff and the Chinese and others can make the toasters and irons. Clinton signed the various free trade agreements and the loss of jobs gained their momentum under Bush. The One World Order seems to be the push to do away with our middle class. After all, what better way to destroy the middle class than to have tax cuts for the rich, spend money for war, send our jobs overseas, and neglect our infrastructure. We have seen a concerted effort through the years for cheaper made goods, a cheap dollar, cheap interest rates, and cheap labor. Their idea is that they wanted other countries to be developed so that they could buy our goods (although we also had to get our wages down and not other countries wages up). Well, I have problem with that as we don’t make a lot of the goods anymore and that why would anyone in China by a higher priced American product – if they can find one.
I can remember the Bush administration who was stuck on the tax cuts and “stay the course” and Bush would say in 2006 saying he believed in a strong dollar and I think he repeated that in spring of 2007. It never happened. There may be more going on than two parties with their failed ideologies. The wheels of the One World Order from the politicians to the fed has practically destroyed our country. And that ignorance still goes on with Obama saying that we will rely on our exports to create jobs. Now really. You close down 57,000 factories over the last decade and we are going to rely on exports. So, evidently, Obama is getting the same info that the past two presidents must have gotten. And let us not forget that Cheney had said that “deficits don’t matter.” And now, you look at the idiots who want to run for president and it is a real joke. Sorry to be pessimistic, but I have seen too many jobs, towns, and livelihoods destroyed. And no one in Washington seems to get it.
America still manufactures more goods by far than any other nation, Gerry.
Well Ponce, glad you are happy. We gave up some 6 million jobs, the unemployment rate is higher, small towns are destroyed. You sound like the typical politician. We have lost every possible leverage to get the economy going as we used up all that leverage. Less taxes, cheap dollar, cheap interest rates, and cheap labor. And China has surpassed Germany, and will surpass Japan soon or may have done that already. And at the rate they are going, they will surpass the U.S. in ten years or so. And we keep going down the same road of destruction. And furthermore, we may produce a lot of goods, but we also have more automation (less jobs) and lean principles (less jobs) and more takeovers and consolidations (less jobs). Add 2 billion cheap laborers into the workforce or free market system and you have more less jobs.
Any mathematical accuracy committed by me was purely accidental.
“And at the rate they are going, they will surpass the U.S. in ten years or so. And we keep going down the same road of destruction.”
Gerry, despite what all the Chicken Littles on the right are saying, America is still a great place to live.
And you know what?
Just about every country that has ever been an economic super power is still a nice place to live even though it’s no longer in that position (see: England, Spain, France, Italy, Greece, Japan, etc.).
So I wouldn’t worry to much about America during China’s age of economic ascendancy.
My oh my. “Stay the course” is still alive. Thanks for trickling down.
Let’s go a little farther with the analysis. Why is figuring the trend peak to trough (as Mr. Ritholtz’s graph does) the appropriate measure? Why not measure peak to peak?
If your measure of the trend is trough to trough, it reveals something interesting. The value of the dollar against other currencies, despite some upwards sawtoothing, has held pretty steady since 1999.
Now I don’t know what the right answer is or even if there is a right answer. I just think that the question is more complex than it’s being made out to be.
The point of the graph is simply to note when the current decline began–I don’t think any further point was being made.
$1,000 of gold is a lot easier to carry around and exchange than $1,000 of almost any other commodity. Exchanging it is easy to understand with no language barrier, it is relatively easy to avoid fraud in the exchange, it can’t easily be destroyed like paper money, or tracked like electronic transactions. Given all that, its relative scarcity and history of being a primary exchange of value mechanism since the beginning of recorded history, if not before, it shouldn’t be too hard to understand why gold is the refuge of last economic resort.
All well and good, but it still misses the basic point: gold is a store of value because human beings have decided it is a store of value.
And, more to the point, the current run up of gold prices is almost certainly going to end in a crash of said prices.
Presumably, it’s just a coincidence that it’s measuring peak to trough (which exaggerates any trend).
Now that I think of it I do have an opinion on this. The chart is misleading. You don’t measure declines in peak to peak trends or peak to trough trends. You measure them in trough to trough trends and that doesn’t reflect the assertion that the dollar is falling.
I take the point. Again, the point of the graph was to deal with the argument that the dollar has been in decline specifically and exclusively during the Obama administration, which is demonstrably not the case.
And to be clear: I am not attempting to make any partisan points.
You live through 2 or 3 gold bubbles and you tend less to think of it as a secure reference of value. Like a lot of things it has a smart money phase and a dumb money phase.
And, we all know that the ETFs amplify that and add risk to the system, right?
Dr. Taylor, yes, if there were no humans gold wouldn’t have any, ahem, human value, but as gold is considered a universal store of value across virtually all cultures, that in and of itself lends it an intrinsic value beyond any industrial or other requisite uses.
Personally, I doubt gold prices will collapse as much as you might think. They will fall at some point, but if your reference peg is, say, a barrel of oil rather than the fickle and increasingly prone to manipulation dollar then perhaps gold is not as overvalued as you believe, or at least enough to cause a bubble to burst. All I know is I’m not selling any of my gold or silver for dollars at this point.
As Dr. Schuler suggests, that chart does rather scream of cherry picking the dates.
This is also true of the dollar, Indeed, I have used dollars in various countries. I reckon, in fact, that it would have been harder to pay for lunch in Lima, Peru in gold than it was in dollars.
My point is less to denigrate gold as it is to point out that it is not as special as people are making it out to be.
Someone please tell me when the dumb gold money phase is about to begin so I can get out of my gold stocks. Quite a few economists are predicting it will rise further to about $2,500 an oz, which bubble I want to ride as far as possible. They also say that gold will continue to rise throughout 2012 and the economy will tank further. Meanwhile I am converting a share of my profits into tangible assets as I go, including a new car, so if the bubble does burst in 2012 or later, I will have ended up with a lot of needful things to enjoy.
As for uses of gold, besides electronics and space, there is the female factor throughout the Middle East, and perhaps China and India as well. Well-to-do women there load themselves down with gold to a shocking extent, and, apparently, it is all carried on their person. It is their dowery and their emergency funds source in case of divorce (throw three stones on the ground while saying “I divorce you” with each stone throw and you are flat divorced. Maybe we ought to look into this!) .
That’s the risk mannning. And I think there have been ETF panics that demonstrate how hard it can be to get to the door …
Many people will make money, and bank it at the right time. But as a long term graph (say 1970 to current) shows, that price seen in the last year of a rally may not be seen again for a decade.
Gee, I am so happy that the dollar has stabilized around a 40-50% drop! Perhaps that is one of the payoffs for the stimulus packages that are being doled out over the next two years or so. If, however, this expenditure doesn’t cause a significant job uptick between now and the end of 2012, and an large uptick in consumer spending too, we may well see major inflation and further downgrading of the dollar taking hold then.
As for blame, I agree that past administrations have been culpable as well as Obama’s, going way back to their collective mishandling of Social Security, Medicare and Medicaid, and the inexplicable off-budget war costs, to name the more apparent issues. Having said that, there is no excuse for this administration’s increase of spending levels in this timeframe, as we are just about broke.
Major inflation is not impossible, but I think it would go hand in hand with “permanent” quantitative easing.
With low employment and an unwinding of the fed balance sheet, wouldn’t see see prices contract again?
BTW, I kind of called off my 2nd house search in Bend Oregon because I thought the downside was too high. I worried about when a really good deal turns into a seriously damaged town.
I just looked at zillow today. Houses are showing up for $80-90K. (Down from a “low end” of $140K a few months ago?)
That is not hyperinflation.
JP, the inflation in commodities will eventually work its way into non commodities. Accept that the govt. will support inflation to ease the pain of paying off its obligations.
Exactly…. Gold is great. But only if somebody wants to buy it.
And here is a hint: Gold has zero nutritional value.
I get that gold has some uses, but the people buying it right now aren’t doing so in anticipation of a sudden surge in the electronics industry. I think buying some commodities as a hedge against inflation, but there’s a lot of commodities better than gold to buy. Thinks like oil, wheat, etc. that people with have an actual need for.
If you believe it you can hedge it. We all pays our money and takes our chances.
For my gold holdings I have placed a standing stop-loss order at 8.5% of the current value. Presumably, that means I can lose only that 8.5% on any one day, unless the market dives far faster than my sale would take, which has happened. However, the tealeaves I read are almost unanimous that we will see a serious economic downturn by the end of 2012, and no real decrease in the valuation of gold will occur at all for a few years more. The two indictors of this will be loss of our AAA rating, followed by International commitments to quit using the dollar standard in favor of some concoction of currencies. Some short time after that event, we will go into an inflationary spiral, it is projected, which will be made far worse by the all out printing of money by the Feds. Both of these events are in the works now at one level or another with S&P downgrading us, and with international money men meeting without us recently to consider how to transition from the dollar. Investing gets very hairy from now on…