There is a fear among Wall Street and the rest of the financial world that the dollar is going to collapse. Presently it is approaching all time lows which is around .78. Some people wonder, “What does this have to do with me?” In this day and age of globalization, it has everything to do with you.
The Fed, Ben Bernanke has placed the dollar in a precarious situation that it will cause long term effects for us if it continues to break down. We will continue to see increases in inflation and more importantly, foreigners not wanting to invest in our debt, i.e. bonds. I’ll break this down for you to show you how it affects us on an individual and collective basis.
For the individual:
- You can expect to pay higher prices for oil. Oil currently is paid to OPEC (Organization of Petroleum Exporting Countries) in the currency of the United States dollars. With a continue decrease in the dollar, it has been speculated that eventually it might be paid with the Euro currency. If that happens, oil will be very expensive for us because of the higher currency exchange in the Euro. This is all because of a lower dollar which has gone lower now that the Fed cut rates. However, even presently, you can expect OPEC to keep prices of oil high to balance against the dropping dollar. Hey, they have to eat too, you know.
- Think of all the things that are in your home that are manufactured overseas. Items like cosmetics, clothing, and appliances will continue to see increase prices. Anything that comes from overseas will be higher as the imports go up. If you do conversion dollar to euro, you will certainly see that values of currency are also changing every now and then. Hence, as recommended by experts, it is important to invest your money on something that will increase its value in the long run.
- A falling dollar creates inflation at home in the form of groceries, feed for animals, building materials, etc. Presently we are seeing the prices of commodities (grains, metals, etc.) breaking out to new highs in their markets. This creates a domino effect in what you are eating. It has been already passed down to you and will continue to be passed down in the form of higher grocery bills.
- If you like to travel overseas, you are now seeing prices 40% higher than in the year 2000 just with the currency exchange alone. Even with our neighbor, Canada, for the first time since 1976, we are now dollar for dollar in exchange. And this doesn’t even take in effect inflationary prices of traveling.
On a collective basis:
- We have a catch 22 here. When you have a falling dollar, it helps our goods to be exported more inexpensively to other countries and reduces our deficit. However, when you have a dollar too low, we could see foreigners not wanting our debt. Fifty two per cent of foreigners own the U.S debt. If foreign investment loses confident in the U.S. dollar, they won’t want to finance our debt. If we have no one to finance our debt, what happens? Well, if you can’t figure that out, ask yourself what happens if you can’t get your debt financed?
The bottom line is the Ben Bernanke is walking a fine line here by lowering rates as much as he did, and you need to pay attention so you can strategize your own financial planning going forward