Demise of the dollar

[Hobo]

For those who are so pessimistic about the dollar, remember one thing... I have traveled all over the world and no other country has the human and financial resources that the US has. In other words, our strength is in our people; and people (with their brains and education) are the foundation that will rebuild our country and our dollar back to its former strength.

Example:About a week ago, I meet two American girls (from South Dakota) in Bali, Indonesia. At age 24 and they had hand sewn samples of clothing to be manufactured in in bulk in Bali. This was the second year they were operating their "global business" and the new enterprise was turning a nice profit.

You don't find the Chinese young people in Indonesia doing business. Multiply this uniquely American trait by the hundreds of thousands of young people who are determined not to be dragged down by the bankrupt mega-banks and the corporations that started with a good idea when their great grandfather was a young man (ie, General Motors).

America may be reeling because of some stupid business practices. But America still has the heart, soul, tenacity and initiative that no other country can compete with. This will keep our country strong in the future, no doubt in my mind.

[Lusitan]

Quote:

Originally Posted by FUEGO A portfolio evenly split 50/50 between US and international investments?

That's been my approach as well.

[deserat]

Hobo - great point - however, for those of us living overseas in Europe being paid in dollars, it is a bit of a downer watching this.....

[FUEGO]

Quote:

Originally Posted by Lusitan That's been my approach as well.

My reason isn't to take advantage of forex changes as much as it is to cover the chance that the US isn't THE predominant world economic superpower over the next 5-6 decades.

[audreyh1]

I don't expect the US to be the predominant economic superpower going forward either. I keep a reasonable exposure to international equities - according to the M* x-ray, about 1/3 of my equity exposure is foreign companies.

In addition, when you invest in US-based companies, you really aren't investing in only the US economy. Most companies have global exposure. Multinationals have huge foreign sales. Even small companies tend to have some foreign sales - some significant.

I think as the US becomes less the dominant economic superpower, investments will naturally evolve to be more globalized. That is where money will flow, and investment products will follow.

Bonds is perhaps where it is more difficult to diversify internationally and away from the US$. This may also change in the near future.

Audrey

[Lusitan]

Quote:

Originally Posted by FUEGO My reason isn't to take advantage of forex changes as much as it is to cover the chance that the US isn't THE predominant world economic superpower over the next 5-6 decades.

Again, same reasoning here. It's not necessarily a short-dollar idea as much as a short-USA idea. But to at least some degree, they may be related, in my humble opinion.

[Bikerdude]

Quote:

Originally Posted by Hobo America may be reeling because of some stupid business practices. But America still has the heart, soul, tenacity and initiative that no other country can compete with. This will keep our country strong in the future, no doubt in my mind.

I agree. I don't think shorting America is a good idea partly because its very popular now and historically has been wrong. Our biggest threat IMO is our politicians.

[HFWR]

Quote:

Originally Posted by Bikerdude Our biggest threat IMO is our politicians.

Who magically keep re-electing themselves...

[Hobo]

Quote:

Originally Posted by deserat Hobo - great point - however, for those of us living overseas in Europe being paid in dollars, it is a bit of a downer watching this.....

Tell me, I live in Indonesia.. and I am feeling the same pain! Misery loves company!

Quote:

Originally Posted by FUEGO My reason isn't to take advantage of forex changes as much as it is to cover the chance that the US isn't THE predominant world economic superpower over the next 5-6 decades.

Let's think about this. First, the definition of gross domestic product is the value added to a product (ie, sales price - cost of raw material). In other words, the value of new products produced in a country. This is stuff that make a country richer and stronger.

The US produces about 30% of the world's gross national product and all the countries of the European Union produces another 35%. (China adds about 7%). You can check out the details at List of countries by GDP (nominal) - Wikipedia, the free encyclopedia

Now if we look at the total exports, it can be seen that the US, Germany, and China are all about equal List of countries by exports - Wikipedia, the free encyclopedia So the US is still very competitive in selling its products overseas.

Looking at the gross numbers, not just the hysteria of the last year, which country is going to topple the US? Nobody comes close to the economic power of the US, and just because we hit a bump in the road, isn't it a little like Chicken Little to say "The sky is falling?"

That is not to disregard things like our huge trade imbalance or our large national debt... those are worrisome issues. However, consider if the US did take an economic tumble. All of the developing countries that rely on the US as a consumer would suffer an even harder blow.

Simply put, if the US economy catches a cold, the rest of the world (except the EU) will be in the hospital with pneumonia! So if you are going to bet against the US, you better make sure your investments are going to places that do not rely on the health of the US economy for their own survival!

[WanderALot]

I think I understand where the pessimism about the US$ is coming from, increased spending, increased debt etc, but I don't see how the US is worst offender. As a percentage of GDP, the US debt is a lot lower than Japan and about the same or less than Europe's largest economies.

Additionally, both Europe and Japan have falling, aging populations. Demographics seems like it is one of the most predictable factors of a country's economy health. I don't see how Japan, with its almost 2xGDP debt, is going to be able to pay down its debt easier than the US can. This doesn't seem like it bodes really well for the Euro or the Yen long term.

It seems like there is no way the US can be as dominant as it has been over the next century, but that can't be expected with the growth of China and India. But I don't see the yuan or the rupee displacing the dollar anytime soon. Besides not being 'world' currencies, these countries (especially India) will have to go into a ton of debt to bring up their infrastructure and environment. Not to mention their upcoming demographic time-bombs towards the end of this century.

My [probably over-simplified] view.

[FUEGO]

Quote:

Originally Posted by Hobo Let's think about this. First, the definition of gross domestic product is the value added to a product (ie, sales price - cost of raw material). In other words, the value of new products produced in a country. This is stuff that make a country richer and stronger. The US produces about 30% of the world's gross national product and all the countries of the European Union produces another 35%. (China adds about 7%). You can check out the details at List of countries by GDP (nominal) - Wikipedia, the free encyclopedia Now if we look at the total exports, it can be seen that the US, Germany, and China are all about equal List of countries by exports - Wikipedia, the free encyclopedia So the US is still very competitive in selling its products overseas. Looking at the gross numbers, not just the hysteria of the last year, which country is going to topple the US? Nobody comes close to the economic power of the US, and just because we hit a bump in the road, isn't it a little like Chicken Little to say "The sky is falling?" That is not to disregard things like our huge trade imbalance or our large national debt... those are worrisome issues. However, consider if the US did take an economic tumble. All of the developing countries that rely on the US as a consumer would suffer an even harder blow. Simply put, if the US economy catches a cold, the rest of the world (except the EU) will be in the hospital with pneumonia! So if you are going to bet against the US, you better make sure your investments are going to places that do not rely on the health of the US economy for their own survival!

The US may continue being the dominant economic superpower. It may not. I don't think it necessarily has to. I'm 29. I hope to be FIRE'd in 10 years or so. I may have a half century where I am living off my investments. I have no clue what will happen in the next 50-60 years.

One can learn as much as a student of history as a student of economics. Consider Spain and Portugal a few centuries ago or England more recently. Dominant or major economic world super powers of their times. Where are they today? They each represent between a fraction of a percent up to a few percent of total world GDP. Bit players. I don't see the US having quite as bad a fate in 50-60 years, but who knows? I certainly don't know (crystal ball is in the shop and all that).

I'm not a pessimist on the future of our country; I prefer to think I'm a realist. I don't invest based on some blind notion of nationalist superiority (we're number 1, we're number 1!). I spread the wealth around a little bit.

If the US remains the dominant superpower that it is, with a strong currency, I may lose out a little on investment returns. But I'll still be fairly wealthy (1/2 the portfolio is in the US after all). If the country goes to crap, and the dollar slowly dribbles into a secondary position in the world, I'll be filthy rich relative to my fellow countrymen. Either outcome I am willing to live with.

And my investing strategy has me buying the more relatively undervalued asset classes. Right now, I'm probably a little light on US investments given the relative outperformance of international investments. New money will be focused more on US investments. Should the dollar take off and international assets start to drop in value, I'll be back to investing new money in foreign assets.

[CCdaCE]

Hobo's #29 post and Fuego's #31 post are excellent posts, and something I've been pondering a lot for the past two weeks. "Should I have more International?" Thanks for the facts, links and cut-thru-the-crap realism. Now I'm off to backtest a 50/50 US/Int'l portfolio for the last ... 2 years?

-CC

[explanade]

Last year, the dollar was almost at $1.60 to the Euro in July. Then the crisis with Lehman in September and the dollar gained to around $1.30 by the end of the year.

Currency traders are making way more money with these moves than we ever will.


How do you store gold? Say the world goes to hell and you have some Krugerrands or bullion bars. Are you going to be able to buy food, fuel and ammo with 1 oz. coins or do you have to shave some of it off?

[Finance Dave]

Quote:

Originally Posted by Want2retire I have 2 more Mondays....

Wow, that's awesome.

I don't get on the board very frequently, so congrats in advance!

Seriously....after you're FIRE'd for about 3 months, I'd like to see a few paragraphs about how you've enjoyed it...the softer side, not just financially...but your health, spirit, attitude, sleep habits, smile-on-face factor, etc.

Dave

[Finance Dave]

Quote:

Originally Posted by Hobo if the US did take an economic tumble. All of the developing countries that rely on the US as a consumer would suffer an even harder blow.

Good observation...but what if the growth in consumers in areas like India and China more than offset the reduced "consumerism" in the US?

[Hobo]

Quote:

Originally Posted by Finance Dave Good observation...but what if the growth in consumers in areas like India and China more than offset the reduced "consumerism" in the US?

I suggest you take a trip to China. The country has only emerged from dire poverty over the past 30 years. Today, the definition of poverty is anyone making over $1.25 per day! So if you hear that China has reduced its poverty rate, don't be too impressed. The middle class (defined as annual income of at least US$5,000) makes up only 10%-15% of the population.

The middle class of China are not buying flat screen TVs on an annual income of $5000 - and it will be a long time before they will be able to consume like the American consumer.

Yes, you will read and hear how China and India are economic powerhouses, but you must remember this statement is made relative to what these two countries were 20 or 30 years ago. It is an economic miracle that 10 percent of the population can increase its income from $1.25 per day to $2.50 per hour. However, they are still a long, long way from becoming true consumers as compared to the US and European consumer.

The idea that the consumer in China is going to be able to buy a majority of the products that China produces is voodoo economics.

[explanade]

I had heard that while the percentage of Chinese with incomes comparable to upper middle-class Americans is low, it could still amount to a couple of hundred million people?

Supposedly they're importing a fair amount of luxury goods including German cars.

And before the financial crisis hit at least, they were starting to become a significant percentage of tourists in places like Europe?

Yet if there really are that many Chinese with relatively high incomes, that hasn't come through in aggregate consumption numbers.

[Texas Proud]

My boss keeps talking about how the dollar is going to tank... and there are lots of talking heads saying this...

I ask... against what? It has to 'fall' against some other currency... which currency is going to get stronger? I just don't see a big decline...

But then he might say, the price go gold is going to go up with all the debt piling up... well, then the dollar is falling against 'goods'... that is inflation... but IMO I would see inflation everywhere... so again, the dollar is not 'tanking'... sure, your purchasing power is going to heck...

[samclem]

The number of people officially living in poverty (by PRC govt standards) actually tripled last year (new number of poor = 43 million. Link ). That's not because people are poorer, but because the govt raised the official poverty line . . . to 1100 yuan or $160 per year ( 44 cents per day) . I'm sure that people get a lot of "free" support from other sources, but these people are poor and won't be buying consumer goods beyond rice and blankets.

And, China's not just por at the bottom: The country has a per capita GDP of $6000. (US GDP/P is $47,000).

But, China has a lot of people, and they are moving up out of poverty. A dollar goes a long way in China, so households bringing in more than $6000 a year are considered to be living comfortably.

Projections are many but here's what the official Chinese Govtguessers think will happen:




That blue line represents those families that will be buying their first microwave oven, a small TV, a cheap computer, a small car, etc.

From the same link as above:

Quote:

At the moment, China's consumer economy is about the size of Italy's, but in two years' time it is going to start adding an Italy every year," says Mr. Grant, noting that while the average Italian spends $11,511 on consumer goods each year to China's $543, the middle kingdom's enormous population makes up for the difference.

Total Italian consumer spending certainly doesn't match US spending, but adding the equivalent of that much consumer spending every year could go a long way to make up, on a worldwide basis, for declining demand in the US if our economy ebbs over the coming decades.

Quote:

Originally posted by Hobo Example:About a week ago, I meet two American girls (from South Dakota) in Bali, Indonesia. At age 24 and they had hand sewn samples of clothing to be manufactured in in bulk in Bali. This was the second year they were operating their "global business" and the new enterprise was turning a nice profit. You don't find the Chinese young people in Indonesia doing business. Multiply this uniquely American trait by the hundreds of thousands of young people who are determined not to be dragged down by the bankrupt mega-banks and the corporations that started with a good idea when their great grandfather was a young man (ie, General Motors).

You don't see Chinese people in Indonesia looking for cheap production capabilities because they have cheaper production capabilities at home in China. And if the buyer for a retailer sees that clothing designed by those American girls, there's a good chance he'll have knock-offs made at lower price in China and you won't see those young ladies in town again next year.

[Hobo]

Quote:

Originally Posted by Texas Proud My boss keeps talking about how the dollar is going to tank... and there are lots of talking heads saying this... I ask... against what? It has to 'fall' against some other currency... which currency is going to get stronger? I just don't see a big decline... But then he might say, the price go gold is going to go up with all the debt piling up... well, then the dollar is falling against 'goods'... that is inflation... but IMO I would see inflation everywhere... so again, the dollar is not 'tanking'... sure, your purchasing power is going to heck...

The value of the dollar is a very difficult subject to get your arms around. The exchange rate is set by the FOREX, not by real purchasing power. I live in Indonesia and the dollar has fallen 25% since May. That's crazy. Why should a dollar be 25% weaker in 6 months? Suddenly the price of a HP ink cartridge is 25% cheaper to local people. Why? Because currency traders are speculating with the numbers. So if the dollar is going to tank, that is good luck for Indonesian people (but bad luck for me). But you can't tell me the actual value of the ink cartridge has changed anywhere!

Do you think gold is a hedge against inflation? I remember in 1980 when an ounce of gold hit $850 per ounce. Adjusted for inflation, in 2008, that same ounce of gold should be $2193.25 per ounce! So gold can be a terrible investment. Look at this chart.. does that look stable to you?


Another thing to consider... if you were a citizen of any other country in the world, let's say China or Russia, and you wanted to keep your money safe, where would you put it? Because China and Russia are unstable countries where the Government (sort of) controls the exchange rate of money, wouldn't you want your money in dollars? Think about that.

To almost everybody in the world, the US dollar is still the best place to keep your money because the US is rock solid stable. If you think the dollar is going to "tank", what logic can anybody possibly use to think the Chinese yuan or the Russian ruble or the EU euro is going to be stable?

We saw what happened when a year ago when the world markets crashed... everybody flocked to the US dollar and ran away from the other currencies. As much as the national debt is rising, and the unemployment rate is raising, the US government is not going to be torn apart by some revolution. Meanwhile, the movement toward democracy could bring down the Communist Chinese at any time; or if Russia tries to revert back to its old socialist ways; these governments could easily tumble.

Simply put, no country is nearly as stable as the United States and the US dollar.