I’m not an economist so bear with me. I’m planning a trip to Europe and am frustrated (nearly to the point of sadness) to find out that the exchange rate is
.67 Euros to 1.00 USD. I recently read that the U.S can increase the value of the dollar and savings rate by increasing the interest rate which currently at 0%. Why isn’t the government taking proactive steps to raise the value of the U.S dollar and make saving accounts a bit palatable than they are now? For example, why not offer bonds with very high yields, sell off a few territories, increase taxes, combined our currency with another country, or sell a some Fort Knox gold bricks from for some extra moola. Would any of these strategies raise the value of our money?
In college, we learned that after World War I, Germany printed out so much cash that its currency collapsed. In contrast, after Bush signed the stimulus there was a jump in the U.S dollar and another jump after Obama signed his stimulus package. **This makes no sense to me. ** If Bush and Obama directs the Treasury to print out a combined 1 trillion dollars, how can the value of that currency go up? Assuming that money is destroyed at a constant rate, logic dictates that if I have $10 dollars the value of the currency I hold will devalue at the rate in which more money is printed (does that make sense?).
I am also miffed at how the Canadian currency is *always *behind the U.S. dollar. I thought Canada was doing great. Shouldn’t their currency be higher than ours? Conversely, I heard that Britain is doing terrible yet the British Pound is worth more than ours. Can anyone please explain why this is so?
Thanks for reading!
Its important to understand that currency valuation is not directly correlated with the strength of an economy. Rather, if the central banker of a nation (such as ours currently) has relatively loose monetary policies, that may be the overwhelming factor in determining currency valuations. So, even if the economy is expanding in real terms (which its probably doing right now) the value of the dollar might still shrink. Also, a weak currency isn’t an entirely bad thing. It makes our goods much more competitive overseas, although it does make foreign good much more expensive to us.
Basically, economists that study these questions with great sophistication have decided the best policy for real economic growth currently lies in loose monetary policy. They’re the ones with the hand on the dial so I guess that means they get what they want.
The dollar is borrowing against future earnings of the American economy. That may be good or futile.
Debt is not all bad. You buy a house that stretches your earning resources. You go on, work hard to be successful and make more money. The debt you took on looks like a charmed investment. On the other hand, you are a loser, you get fired and the creditors come calling. Oops!
The value of the dollar is based on what the market perceives as its direction. Study the value of the Euro as a prime case history of markets doing evaluations. It’s all relative. Look at the historical valuation of the Euro and the perception of the European economy. Then it all starts to make some sense. As bad as the Euro looked in the late 90’s, it could look just as bad against the dollar in a few years if things go in the right direction for the US economy and the European economy takes a wrong turn. Not saying it will happen but that’s how the markets work. Now, place your bet!
It’s at least partially an artifact of the onset of the recession. There was a “flight to the dollar” when the stock market collapsed and every one decided that the dollar was the safest place to put their money in uncertain times. As things have improved, demand for the dollar has slacked back to its previous state.
It’s still low, but the precipitous looking decline is because it was previously inflated. You can see the spike that starts in the fall of '08 here. Some less intellectually honest folks sometimes crop the chart off at the start of '09 to hide this fact in order to connect a falling dollar to whatever their pet economic theory of approaching apocalypse is.
Most wouldn’t, but some would. But the question is, why do you want the dollar to be more valuable?
I realize it’d be nice to be able to buy more Euros when you go on vacation, but Americans going on vacation to Europe is a pretty small concern in terms of the American economy. A rising dollar is fine for you, but it’s going to suck pretty bad for, say, American businesses who export products. Costlier dollars mean those businesses LOSE money, since they’re either going to see the price of their products go up to foreign consumers or they’ll have to reduce their prices to make up for it.
Of course, there’s upshots to a higher dollar; imports become cheaper. But the U.S. is, on the whole, an exporting country.
First of all, you’re conflating different events. Hyperinflation in Weimar Germany was the result of the creation of money. The stimulus packages are simply the redistribution of existing money. Bush and Obama didn’t create that money; they’re taxing it out of people’s pay and then respending it. (Well, a lot of it’s borrowed, but in the long run, same thing for our purposes here.)
Again, why?
The value of a unit of currency isn’t some even measure of the strength of the economy. Canadian dollars are slightly less valuable than American dollars because, relatively speaking, there’s more Canadian dollars as compared to the size of the Canadian economy. There’s nothing more to it. Indeed, Canada would be very, VERY badly off were its currency to suddenly rocket up in value against the U.S. dollar; it’d be a terrible thing for much of Canadian industry, since their prices would soar to U.S. customers.
And of course, a lot of currency value is speculation. Yes, the Canadian economy is stronger, but bear in mind that Canada’s economy is heavily dependent on resource extraction. Right now, the price of most metals is down, and oil is flat, which knocks the loonie down a few cents.
The Japanese yen is extremely tiny in value as compared to a dollar, but the Japanese aren’t wallowing in poverty. Marking the value of a currency as being a barometer of the country’s weath is silly. It’s like saying that if I have a $1 bill and you have four quarters, I’m richer than you because my unit of currency is worth more than yours. Just because some countries have a different ratio of currency to goods doesn’t really have much to do with how well their economy is doing.
As you briefly touched on, what matters is dramatic changes in currency value, since that warps economic behaviour. It really makes no difference in the long run if the U.S. dollar is always less valuable than the Euro, just as it’s never really mattered to Canada that its dollar has been less valuable than the U.S. dollar. But if the U.S. dollar were suddenly subjected to hyperinflation (as in Weimar Germany) the results would be catastophic.
Umm, because if it those things, it’d stop people from spending money, which would throw the economy back into recessesion. It’s literally the exact opposite of what should be (and is) done.
But, you’re right, all those things would raise the value of the dollar.
For some reason, people think having an expensive dollar is great. Well, to some extent it reflects the power of our economy. But, arguably, it doesn’t do us much good. The Chinese base their whole economy on reducing the value of their currency, and their strategy has worked miraculously.
Because raising the value of the US dollar is not an objective of US policy. Low interest to boost investment and ease your financial crisis is. At present, with your savings rate jumping (as debt is paid down), the problem for the US short term is not savings. Of course research suggests that small savers are not particular sensitive in reality to small changes in retail rates for savings.
And regardless, as the US needs to reduce imports and increase exports to bring its trade balance to more sustainable levels, a weak US dollar is helpful.
Raising the interest rate would raise your currency, certainly, it would also be catastrophically stupid, and pitch you into a depression.
The other items are, well, varying between irrelevant to odd (except maybe taxes).
American levels of dollar creation are no where near Weimar Germany. The currency market responses to the recent US Administrations actions may be attributable to a variety of effects, such as greater desire to hold US assets out of confidence that economy is not doing so bad relative to other opportunities (i.e. buying US dollars to buy US assets), or flight to US as safe haven in crisis.
Most money does not exist as physical currency but as notional accounts, so your idea of money (physical) being destroyed at a constant rate doesn’t have much sense.
As it happens with the financial crisis a great deal of liquidity (money) was destroyed, although it was not physical.
Without complex economics, however, yes, if money supply (as measured in meaningful terms - physical money no longer being very meaningful) expands without an increase in assets / underlying wealth, then your money is worth less per unit. Or another way, if money expands faster than wealth, an individual unit of money is worth less. This is inflation in a simple sense.
That’s not bad per se, so long as it is regular and not excessive or excessively variable.
Eh? So?
Well, the Canadian dollar is less in demand, in the end.
Btw, an interesting factoid: an impulse similar to the OP’s – trying to raise interest rates, and hence the value of the dollar, as a response to bad economic times – directly caused the Great Depression.
Then, it was a bit more justifiable, since exchange rates didn’t float (didn’t automatically adjust) and affected the flow of gold. The fear was that low interest rates and a weak dollar would cause gold to flood out of America.
No… wait a minute… that didn’t make any damn sense either. Oh no, our precious gold! We should all be much more thankful for our more advanced (read: not completely idiotic) understanding of macroeconomics in modern times.
Are you a business owner? Do you depend on having sales? Do you need loans for your business? How would you like it if the government simultaneously encouraged consumers to not spend and made it expensive for you to borrow (both via raising of interest rates)?
When such a process starts, and especially is outright encouraged, it cascades into a grinding down of economic activity. Everyone sits on their money, their high-priced dollars, but the money doesn’t flow. Money is only good when it’s flowing.
A lot of market valuation was destroyed but that’s not necessarily the same thing as money or a liquidity crisis.
Certainly a destruction of market of valuation can lead to distrust of asset prices which leads to hesitation to lend money (liquidity) using those shaky assets as collateral.
I’m sorry, I should have been more specific. The current interest rate is 0%. If the Fed changed this to .30% would would happen? You mentioned that the raising interests would be the equilavent to the government encouraging consumders not to spend. What does a 0% say to small businesses? What would a .10% increase say? .20? etc?
it says (to banks, as they are the only ones who get to borrow anywhere near 0%) go ahead and borrow money - and hopefully spend it (for these banks, the spending is in the form of issuing loans)
Ok, well that’s a good question. The Fed asks it every time it has a meeting. It moves the target rate by a quarter percent each time, so it figures 0.1% isn’t worth bothering over. 0.25% isn’t a big effect, just a nudge. Movements of several percent have large significance.
Btw, the value 0% has another significance. It means: “we can’t stimulate any further using our current methods!”
Also, it has traditionally been the view to approach this whole issue from the POV of interest rates, as you have done. But many economists advocate analyzing the actions that the Fed takes to move the rate. Ie, it’s not the rate, it’s the money that Fed creates and burns that affects the economy.
The Fed mechanisms for controlling the economy are woefully inadequate, and the fact that banks are charging 10% interest these days is the greatest demonstration of it. Screw going through the banks, just give the money to me!
Relative differences in interest rates can drive a lot of what is called “hot money” for short term investors. Raising the interest rate in the current climate would send end-user borrowing costs through the roof, and strangle your economy.
You are essentially - because you want a cheaper European vacation I guess - arguing for a policy similar to the 1930s. That did not work out well.
Eh?
I believe your Fed has actually tried interest rate controls in the past, they tend to work very badly. Banks are simply recapitalising (charging more for risk), the super low rates of the past ten years were not long run sustainable.
Well, yes. And there was pretty bloody clearly a global liquidity crisis. Our friend here is having trouble with far simpler concepts. I am trying to keep it simple.
It is futile to talk about the dollar going up or down and only talk about US policy.
The dollar goes up or down in relation to other currencies. It does so based on the market’s reaction to the relationship between the *differing governement policies *and the *differing economic situation *in those countries.
If absolutely nothing changed in the US & China or Japan or Europe changed something, or investor sentiment changed, the dollar will move up or down. And the relationhip between the yuan, the yen and the euro would change as well.
So while there is nothing wrong with the various ideas others have posted about US policy & its effect on the US & hence the dollar, understand that that is much less than half the total equation. Implicit in most of those “Fed changes this therefore *that *will happen.” statements is an assumption that nobody else is changing anything. Which is patently unrealistic.
First let me make the point that inflation (massive inflation, anyway) is caused by too much money chasing not enough goods. In the US, the situation is reversed. Too little money and high inventories of unsold goods. (That may no longer be true but has been for last year or so.) This inevitably leads to deflation. And it has, they are called “sales”, in order to disguise the fact that they are price cuts. By calling them sales, the merchants are saying they are temporary. The stimulus and 0 interest are attempts to increase the money supply.
Now I think this all has relativey little to do with currency markets. Yes, higher (much higher, I think) interest would bring in short term money and raise the dollar, again short term. But a much more serious problem is the trillion or two of US dollars held by China. If China ever decided to sell any significant part of that, duck. A $1.50 Euro will look like paradise. Even the possibility has people scared and drives the dollar down (which of course increases the likelihood the Chinese will pull the plug). All this is why I told my broker two years ago to get me entirely out of US stock. (I also didn’t want anything to do with either China or Russia because I won’t put my money any place that doesn’t have a rule of law.) One result is that my portfolio went down maybe 5% at the worst point and is now back to where it was two years ago.
Raising interest rates would not only make it even harder for merchants to borrow money for their business, but if it resulted in a higher dollar, it would increase imports, decrease exports, and generally worsen the economy. My only foreign travel these days is to the US (where the CAD is doing fine, thank you) and Barbados whose currency is firmly tied to the USD at the rate of 2 bAD to a USD. Europe has simply gotten too expensive (not to mention that air travel has become intolerable in sardine class).