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Do you hedge against the possible devaluing of the US dollar?
Old 07-30-2020, 08:20 AM   #1
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Do you hedge against the possible devaluing of the US dollar?

Iíve never been one to worry much about the value of the US dollar, but with all the political turmoil in the US, contracting GDP, and mounting federal debt (with no end in sight), I canít help but wonder whether my hard-earned retirement savings will ultimately be devalued or possibly rendered worthless if the dollar collapses and/or loses its reserve currency status.

Does anyone else worry about this? If so, what are you doing about it?
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Old 07-30-2020, 08:26 AM   #2
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Why worry? We'll go back to bartering and everyone will be in the same boat. I think TromboneAl (in case you're still reading, Al. We miss you) should write a novel about the world without money.
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Old 07-30-2020, 08:28 AM   #3
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Originally Posted by Austin704 View Post
Iíve never been one to worry much about the value of the US dollar, but with all the political turmoil in the US, contracting GDP, and mounting federal debt (with no end in sight), I canít help but wonder whether my hard-earned retirement savings will ultimately be devalued or possibly rendered worthless if the dollar collapses and/or loses its reserve currency status.

Does anyone else worry about this? If so, what are you doing about it?
You better believe it. I hedge by having Index ETFs, especially International Index ETFs which go up with dollar going down.

I should had bought some gold. (Hindsight 2020)
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Old 07-30-2020, 08:45 AM   #4
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That's why I have DODFX as part of my portfolio.
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Old 07-30-2020, 08:53 AM   #5
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... Does anyone else worry about this? If so, what are you doing about it?
Well, "worry?" Probably not. I don't worry about things I can't control but I do try to have defenses against significant risks.

In the case of the dollar, we hold almost all of our equity tranche in VTWAX. This is a cap-weighted total world fund, so IIRC the US is about 55% and ROW is about 45%. If the dollar gets hit to the tune of, say, 20%, on paper that ROW portion will go up about 25%. In reality there will be a huge mess, with maybe 20% inflation in the US as everything bought and sold on the world market goes up in dollar terms. Food, oil, consumer electronics, ... Secondary effects will raise prices for plastics, air travel, etc. and prices of local services (barbers, for example) will rise as they try to survive the inflation. This is inflation that monetary and fiscal policy cannot touch, either. But in the end the people like us and @TechLead will benefit from our international holdings.

So will it happen? Almost certainly but no one knows when or how. The Euro is a mess because southern Europe is a mess. The ruble is off the table as a candidate because Russia has cemented its place as an enemy of the West. No one trusts China, ... and so on. The dollar is thus the least bad choice. The most probable outcome is a basket of currencies like the IMF's SDRs: https://www.imf.org/en/About/Factshe...wing-Right-SDR I am not smart enough or educated enough to understand all the details here but it is clear that the world hates us mostly on general principles but also because we are able to use our reserve currency position to punish people we don't like.

Edit: Forgot to mention we hold 90% of our fixed income tranche in TIPS. Indirectly that is a devaluation hedge.
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Old 07-30-2020, 11:45 AM   #6
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Why worry? We'll go back to bartering and everyone will be in the same boat. I think TromboneAl (in case you're still reading, Al. We miss you) should write a novel about the world without money.


Well, because Iíd rather not go back to bartering as an old man... Iíd rather continue to have more than enough to live comfortably... And if I can take defensive steps now to mitigate the risk, Iíd like to know what they are!
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Old 07-30-2020, 11:52 AM   #7
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My only hedge is the same one I've been using since the '70's. Spend less now in case I need the money later.
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Old 07-30-2020, 12:30 PM   #8
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Quote:
Originally Posted by Austin704 View Post
Iíve never been one to worry much about the value of the US dollar, but with all the political turmoil in the US, contracting GDP, and mounting federal debt (with no end in sight), I canít help but wonder whether my hard-earned retirement savings will ultimately be devalued or possibly rendered worthless if the dollar collapses and/or loses its reserve currency status.

Does anyone else worry about this? If so, what are you doing about it?
There is political turmoil, contracting GDP and mounting federal debt everywhere in the world. So, take a step back, take a deep breath, and ask what are the alternatives.

In one scenario, the US$ loses value relative to other currencies. For that to have a meaningful impact on us, the Yen or the Euro would need to gain substantial value. Thatís not likely, as their central banks will probably intervene in the currency markets to keep their currencies within a range. If central banks continue to act as they have, the US Treasury bond will continue to be the global safe asset and Treasuries the most liquid market in the world. Neither Europe nor Japan (nor anyone else) want the role of reserve currency.

The other scenario is, in aggregate, the major world currencies - Yen, Euro, Franc, US$, all lose value. This is posisble, especially if all the central banks monetize the debts. But there needs to be some inflation. In that case, one would want to own a basket of assets that will hold real value over time. Commodities, real estate, and (mostly) equities.
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Old 07-30-2020, 12:31 PM   #9
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Nah, I don't worry about the dollar losing value.
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Old 07-30-2020, 12:44 PM   #10
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Neither Europe nor Japan (nor anyone else) want the role of reserve currency.
Why not? Everybody would love to have currency that is Global Reserved Currency. USD is now 60% of global reserves (Going down in last 4 years)

This is what allowed us to print all that money and get away with it. It is a great advantage US has over other central banks.
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Old 07-30-2020, 12:59 PM   #11
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I worry enough about it to have 25% of my AA in a global ex-US equity fund. I used to keep 50% international exposure, but my simplified AA wasn't quite as tidy at that allocation. I wouldn't go less than 25% or higher than 50%, but it does provide a significant diversification.

Having a sizable mortgage is also good if we have serious inflation. I will be paying it off with worthless future dollars.

US stocks are probably a partial hedge as well. They have some exposure to foreign economies via global companies and have some ability to keep up with inflation. And like many foreign economies, a weak US dollar would help our exports.
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Old 07-30-2020, 01:22 PM   #12
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Well, because Iíd rather not go back to bartering as an old man... Iíd rather continue to have more than enough to live comfortably... And if I can take defensive steps now to mitigate the risk, Iíd like to know what they are!
Meant in jest.
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Old 07-30-2020, 01:40 PM   #13
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... If central banks continue to act as they have, the US Treasury bond will continue to be the global safe asset and Treasuries the most liquid market in the world. ...
True enough. If.
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...Neither Europe nor Japan (nor anyone else) want the role of reserve currency. ...
Actually not true. Europe has already created a workaround to avoid US$ for commerce with Iran. The IMF's SDRs are also a workaround. Japan is probably not a player until their economy improves substantially, but Brussels would love to become what New York presently is.

One of the big international issues is that the dollar's status permits us to use our banking system as a political weapon. People hate that.
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Old 07-30-2020, 01:45 PM   #14
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Actually not true. Europe has already created a workaround to avoid US$ for commerce with Iran. The IMF's SDRs are also a workaround. Japan is probably not a player until their economy improves substantially, but Brussels would love to become what New York presently is.

One of the big international issues is that the dollar's status permits us to use our banking system as a political weapon. People hate that.
“Not true”? Just to be clear, are you saying that Europe (or Japan) wants to be the global reserve currency?

The IMF has been proposing SDR for over 50 years. So far, no takers.
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Old 07-30-2020, 02:17 PM   #15
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I'm not too worried.

If the US dollar devalued by 25% for example, it wouldn't really hurt too much.
It would mean imported things go up in price, but all the stuff produced here (food) would remain the same price.
So oil (gas) would increase, but it's already cheap so an extra 50 cents won't hurt most folks.
International travel would see some steep increases.

Just ask Canadians, how has it been since their currency devalued from 100% USD to 72% USD starting in 2013 (approx)
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Old 07-30-2020, 03:10 PM   #16
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Well, because Iíd rather not go back to bartering as an old man... Iíd rather continue to have more than enough to live comfortably... And if I can take defensive steps now to mitigate the risk, Iíd like to know what they are!
I dunno, it could be fun.

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Old 07-30-2020, 05:46 PM   #17
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I'm not too worried.

If the US dollar devalued by 25% for example, it wouldn't really hurt too much.
It would mean imported things go up in price, but all the stuff produced here (food) would remain the same price.

<SNIP>
I tend to agree. I might replace a thing or two before I kick, but I have NO plans to "buy" anything (imported or otherwise) other than consumables. Got more than I want of "stuff" and don't want anymore.

I think my fear - if the dollar significantly devalued - would be that SOMETHING caused it. Whatever that something would be (maybe world catastrophe, US catastrophe, another COVID, etc. etc.) might be much worse than being able to buy less imported stuff. Naturally, since I'm no economist, YMMV.
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Old 07-30-2020, 07:32 PM   #18
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One cannot hedge against everything in life. For some things one just plans and hopes for the best. For this one I will just go with the flow.
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Old 07-30-2020, 08:11 PM   #19
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Does anyone else worry about this?
I don't.
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Old 07-30-2020, 08:29 PM   #20
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Our VG International Bond Index Fund is supposed to be hedged. Our VG International Stock Index Fund would have a relative tailwind if the dollar falls, so thatís a hedge. Altogether, we have about 28% international exposure currently and itís fine with me if it becomes a growth engine in the portfolio. Otherwise, I agree with the comments above that the dollar will remain the reserve currency due to lack of viable alternatives and, longer term, a weaker dollar means good things for U.S. manufacturing, so thatís a kind of hedge, plus big U.S. companies already earn globally, another hedge. No need to worry.
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