Thursday, February 14, 2008
What's Happening to the US Dollar?
I have read and I have seen on TV that merchants in New York City (NYC) have put signs in their windows advertising that they accept payment for goods in Euros. This reminds me of when I was in the US Army and stationed in Korea in the mid 1960's. After we landed, one of the first things we did was to turn in our US money for what we called "MPC". I think MPC stood for Military Personnel Currency. The MPC came in all denominations all the way down to five cents. We were allowed to keep our pennies. This funny looking paper money, that came in various sizes and colors, was to be used to pay for goods and services. The base PX (post exchange) accepted our funny looking MPC as it was the legal tender for military personnel. But, what I found so interesting was when we went into the villages or towns, (I was stationed up north, near the DMZ) the merchants gladly accepted our MPC. Remember MPC is not Greenbacks, the paper money we all use at home. In talking with some of the older NCO's that had been to Korea before, I found out that not only did the Korean merchants accept MPC, but that many of them actually saved it as a hedge against the inflation of their own currency the Won. So what does that have to do with us here in the US over 40 years later? Think about it. Later, in another piece I will get on my high horse and talk about the US Dollar, oil priced in US Dollars and the increasing price of a barrel oil, but I will save that for another day. Money can be many things, but one of its most important qualities is that it is used to purchase goods and services. When your money buys fewer goods and services for the same dollar, we call that inflation. But money can also be a store of wealth. A silk prayer rug can be a store of wealth as can a Rembrandt painting. Rembrandt isn't flooding the market with his paintings like the US Government is flooding the market with our paper money. You may want to think about how you are going to hedge yourself against a dollar that is falling in value. Stay tuned.
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Inflation has been fairly steady at just around 3% for many years. I suppose time will tell as the currency value of the US dollar falls if that rate will tick higher. Conversely as a result of inflation, though, GDP will also rise in value and the cost of exporting goods from foreign countries into the United States will rise, making it more viable if not more sensible to have those goods produced here. That means jobs. Let us not forget that a devalued currency has been perhaps the biggest boon to the Chinese economy and something we have long tried to dissuade. A devalued currency is only part of the reason manufacturing in China is so attractive cost-wise. The strength of the American dollar and the US economy as a whole has a lot to do with the confidence in the people of this country that they will be afford to buy anything at all, no matter where it is produced.
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