I remember that 6 years ago, I was able to buy a house in my country of origin, a very nice house in a very nice area, for a mere $50,000. Fast forward to today, that same house now costs $600,000 (I’m not kidding). The price of the house was up 12 times in the span of 6 years. Apparently, the dollar has been devalued excessively over these past 6 years. But what happened that lead us here?
Well, many things happened:
- The US adventure in Iraq started bearing fruits, but these were fruits of different nature. The fruits included mistrust in the US economy because of the exorbitant spending on the war (last time I heard of this issue the US spent over $1 trillion on the Iraq war alone), massive debts, and ultimately fear from the USD as a reserve currency.
- Oil was up considerably in the past 6 years, I remember I was able to fill in my tank for something like $20 or so. Nowadays, that same tank will cost me $100 to fill. What’s interesting is that the price of gas went much more than that of oil (so while oil went up only 2 folds from then, gas prices went up 4 folds). The increase in oil prices contributed to the massive inflation.
- People working outside of the US benefited from a favorable exchange rate. Back in 2001, 90 cents used to buy a Euro. Today, you will need something like $1.44 to buy a single Euro. Same story for the Canadian dollar, the CHF (Swiss France), and the Yen.
- The economies of the BRIC countries exploded. Brazil, Russia, India, and China have all started benefiting greatly from their long term financial plans to expand their economies. That expansion came at the expense of the USD.
- While (unfortunately) Americans are getting poorer, people elsewhere are getting richer, which is increasing worldwide spending. Most people in some developing countries, such as India and China, didn’t have enough money to buy food a decade ago. That has changed, not only now they can buy food, they can also buy decent food, and they can buy luxury items. China is the number one buyer of cars since 2009, and a few weeks ago, China surpassed the US in becoming the number one buyer of personal computers, which is saying something. While the American economy is contracting, other economies are expanding at an alarming speed. Having the USD is easier than before, and it’s all about supply and demand. Imagine we’re talking about bananas, if only a few million bananas were cultivated each year, then bananas would be very expensive, but when there are billions and billions of bananas, then bananas can be sold for as little as 50 cents a pound. This is the same for the USD, when there is just too much of it worldwide, then it starts losing its intrinsic value.
- Investors are fleeing the USD to the so called hedge currencies (CAD, YEN, CHF, AUD) and gold.
- The treasury is printing money like there’s no tomorrow. The US economy is running into trouble again? No problem, let’s throw another trillion or two in the market (that’s trillion, 1 with 12 zeros next to it).
- The interest rates in the US (and thus the whole world for USD accounts) are at an all time low. Would you like to buy a house for a fixed rate of 4.5% for the next 30 years? Of course, I want to, that’s a very tempting offer! In fact, I’ll buy two houses, you know what, make that three!
The era of cheap money is now, but it will end soon. The US cannot continue, for foreign and local considerations, to devalue its dollar. However, the devaluation of the US dollar is now greatly helping the US economy, I think if the trend continues, American workers will start producing “stuff” that will be sold for Chinese consumers! I think this is the last year (at least for the medium term) where the USD will continue its decline, because of the US money policy. Next year, the Euro will become the main concern for investors (I think the Euro will vanish by 2013 anyway) as well as the other so called hedge currencies.
The dollar will survive, but its devaluation will not be reversed. That house will not go back to $50,000, well, it won’t even go back to $200,000. What’s done is done, but the dollar will be steady for years to come and will remain the number one reserve currency in the world, unless the US policy makers do something really, really terrible for the US economy.