Friday, November 09, 2007

Currency Exchange rates and how they effect you

Exchange rates are extremely important. The value of the US dollars is rapidly dropping and our politicians do not seem to care at all. This should be one of the main issues the Presidential candidates are addressing; however, it is not.

I want to start this post by talking about exchange rates. Exchange rates are extremely important and many people do not understand them.

My father-in-law moved to Germany about a year and a half ago. When he moved to Germany the exchange rate was $1.18 to one Euro. Yesterday the exchange rate was $1.45 to one Euro. Unfortunately for my father-in-law and his wife they are civilians who work for the US military and they are paid in US dollars. This means that their purchasing power has dropped by almost 23% since they moved to Germany. So if $100 used to buy 30 Big Macs in Germany, today the exact same $100 in Germany would buy 24.4 Big Macs (As long as the price of a Big Macs has stayed the same in Germany). It sucks to be my father-in-law in Germany.

From 1945 – the 1990’s the United States maintained a strong currency policy and it had been one of the goals of our Economic and monetary policy to keep the US dollar strong in relation to other currencies. This has changed over the last decade (Due to actions by both Republicans and Democrats).

Our currency is plummeting in value for several reasons:
1. The Fed recently cut interest rates twice.
2. Inflation has been increasing somewhat.
3. We have a massive trade deficit that is increasing each year.
4. Our economy is expected to grow very slowly and several other countries in the
world are expected to grow much more quickly (China, India, and Russia lead the
5. The sub-prime mortgage crisis has had a significant effect on our currency.

There is one factor that helps keep our exchange rate from dropping even further:
1. A large and consistent budget deficit.

In December of 1998 it took $.847 to purchase one Euro. Today it costs $1.45 to purchase on Euro. The purchasing value of the dollar vs the Euro has declined by over 71% in less then nine years. The European Union, a collection of mostly Socialist Countries, is “kicking the crap out of the US” from an economic standpoint. This is a massive development and I will bet that most of you have read nothing about it in the mainstream media.

The Federal Reserve has a great document about exchange rates; I suggest you read it:

The weakening of the dollar should terrify Americans. It should terrify Americans because our annual budget deficit is financed mainly by China and Japan. If China and Japan decide to stop purchasing US treasuries then we will be in huge trouble… That time is coming in my opinion…

The weak dollar has the following effect:
1. It helps those US companies with operations in the US who export products
2. It should entice more tourists from foreign countries to come to the US (This has
not been the case to date).
3. It entices foreign investors to purchase US companies and assets.
4. Consumers face higher prices on foreign products (Except China since they
pegged their currency to ours).
5. It really hurts Americans traveling and living abroad.

Our politicians in Washington DC just do NOT understand what they are doing…

Mike Sylvester


Anonymous said...


Tim Zank said...

Mike, is this the first instance of the dollar taking a hit, or has this happened more than once before in the last couple hundred years??

Seems to me I heard similar fears in the 70's.....

Jeff Pruitt said...


You are right on the money with this post. At one point you say:
"It should terrify Americans because our annual budget deficit is financed mainly by China and Japan. If China and Japan decide to stop purchasing US treasuries then we will be in huge trouble… That time is coming in my opinion…"

The threats started back up two days ago:
"LONDON (Thomson Financial) - The dollar remained close to record lows against major currencies, still pressured by comments out of China that it may diversify reserves away from the US currency, and after a Fed official defended September's interest rate cut.

The dollar weakened to a record low of 1.4729 against the euro, and to 2.1070 against the pound after Cheng Siwei, vice chairman of China's National People's Congress said the Asian giant may switch to 'stronger' currencies."

Also, I don't think a lot of people realize that oil prices are hitting US consumers harder than everyone else in the world right now. The reason is that oil prices are always quoted in US dollars and so as the dollar weakens it costs Americans more of their own money to buy oil than it does in other countries.

We are in trouble...

Robert Enders said...

Have any of you wondered if we are likely to have Weimar Republic-style inflation in this country? That might end up being the defacto "solution" to the debt and Social Security crisis. After that, no one in their right mind will loan this country money again.

Fr. Fozy Bear said...

The solution is simple of course to most Democrats and Republicians, cap oil like the Canadians cap pharmaceuticals.

Of course this also is an even more perfect reason to introduce the Amero currency next year and just do away with the dollar.

Please also note my sarcasm.

Anonymous said...

Their actions are logical from their perspective - to get their financial contributers happy.

gadfly said...

Chicken Little has been heard from ...but the sky is not falling. Robert Enders knows that there is no hyperinflation and any good accountant such as Mike Sylvester or myself will tell you that our manufacturing sector has been benefiting from a weaker dollar for several years now.

Sending more value-added goods overseas has been whittling away at our trade imbalance ... although in a world economy, I am not sure just how important that is.

The politics of oil is causing our escalating crude prices ... there is no need to blame a weakening dollar. When we begin tapping our ANWR, Gulf of Mexico and California Coastal oil resources, we will again be oil independent. The politicians, particularly our economically-blinded Democrats (at the behest of their environmental whacko friends), need to quit blocking and begin authorizing domestic drilling. They also must grease the skids for additional refineries. When that happens, we can start pumping from our older capped wells and tap our shale and coal oil reserves.

And the sooner we abandon this ethanol fiasco, the sooner food prices will return to normal. Ethanol can never dent our energy supply problem ....

Robert Enders said...

I agree that the government should stop subsidizing ethanol. Even if all US grown corn was used for ethanol production, it would only replace less than a tenth of all gasoline used here. But there are two things regarding ehtanol that the US can do to put a dent in gas prices.
1. Eliminate ethanol tarriffs.
2. Eliminate sugar tarriffs, and start using imported sugar to make ethanol in the US.
It is cheaper and more efficient to make ethanol from sugar than it. This would not make us energy independant, just less dependant on OPEC. I'd rather buy sugar and ethanol from our allies than countries that call us the Great Satan.
Yes, we should also do more domestic and off-shore drilling.

I never said that there was hyperinflation taking place. I asked whether or not it would happen in the forseeable future.

Anonymous said...

It's a double whammy for Americans. Oil is going up and the dollar is going down Gas has dropped in price in Canada because their dollar is up 7%

Tim Zank said...

So, should I be terrified or not? Time to sell off my portfolio & real estate and move to downtown Ft Wayne?

LP Mike Sylvester said...

Tim Zank:

You SHOULD be concerned; however, you should not panic.

I think that prudent investors are shifting part of their portfolio's based on the weak dollar...

Mike Sylvester

Jeff Pruitt said...


Your position that we should not blame the weakening dollar for a rise in oil prices is 100% incorrect. It obviously doesn't deserve all the blame but it's part of the reason we're getting hit here in US harder than other countries...

Anonymous said...

never mind we can invest in solar/wind/water power. Mid 70's is when we should have started, but the those that deal in black gold did not want that to happen.
Good thing we have been making SUV's for 10yrs, 10mpg is just outstanding, atleast the minivan gets 20.


Robert Enders said...

Solar/wind/water are fine for generating electricity. But electricity is very inefficient for powering a motor vehicle. General Motors tried and failed to create a practical electric car. Oil companies may not want people to use alternate energy, but a car company would like nothing better than to build a car that runs off anything cheaper than gasoline. Car companies make their money off of selling you a car, not gas. If a car could be built that ran off off of a cheaper fuel, people would drive that car more, wear it out faster, have more maintenence performed on it, and have to replace it sooner.

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