How does the dollar lose value?

Discussion in 'Politics, Religion, Social Issues' started by phas3, Jul 2, 2012.

  1. phas3 macrumors 65816

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    Oct 5, 2008
    #1
    Can someone that has a better understanding with Economics shed some light on why/how does the dollar lose value? I know that part of the reason why is because the Federal Reserves keeps printing money, but I want to know what else is driving the dollar to lose its value.
     
  2. kettlecorn macrumors 6502

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    Jan 21, 2011
    #2
    This is a lot more complicated than one would think. Even among economists there are various theories as to what is causing what. Macroeconomics made my head spin. (was an economics major lol)

    Here's a pretty simple and explanatory video from the Khan Academy. More on the current situation regarding China.

    http://www.khanacademy.org/finance-.../china-pegs-to-dollar-to-keep-trade-imbalance


    The value of the dollar is affected by many things, not just trade with China. But trading is a large part of that.
     
  3. Dmunjal macrumors 65816

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    #3
    Recently, money printing is the primary reason.

    But you have to ask the question, relative to what? Normally, it is based on the world's perception of our economic prospects. If our economy is doing well, capital will flow to our country creating demand for our dollars and debt which will drive the dollar higher compared to other currencies. Conversely, if our prospects are poor then capital will flow out of the country and the demand for dollar will decrease.

    Right now our prospects are VERY poor with our debt and annual trade deficits. So why is the dollar relatively strong? Because the other currencies are so much worse. However, one currency shows what the dollar is really worth since it is much more stable because you can't print it. This is gold and it has appreciated from $250 to $1600 in the last 12 years.

    The other reason the dollar remains relatively strong is because it is the reserve currency of the world. That is the world needs dollars to trade for oil and most other commodities. This is slowly changing and I doubt the dollar will remain the world's reserve currency.

    The dollar's future value will likely follow what the British Pound did in the 1900s as the UK lost influence in the world.
     
  4. wordoflife macrumors 604

    wordoflife

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    #4
    There are many small reasons (almost too many to count, pinpoint, and agree upon) that keeps the dollar afloat.

    But looking at things from a whole, the reason the dollar ($) still has value (despite the massive ongoing printing) is because the US can afford to pay off the interest on their debts. The dollar is basically still being traded (and maintaining value) because people still have faith [the belief that it still has value] in it (for how long - I don't know). That's basically what's backing up the dollar after getting off the gold standard.

    How is the interest being paid? Well, the money is coming from many places (depending on how the US gains its revenues), but one of the biggest sources is through trade with other countries (exports/imports).

    If the US doesn't cut even to at least pay the interest on it's debt, people lose faith in the dollar and you know the rest.
     
  5. vrDrew macrumors 65816

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    #5
    Any currency will suffer inflation (ie. loss of purchasing power) if the supply of available money exceeds the demand for it.

    There are many reasons for this phenomenon, but strangely enough in a modern-day economy such as the US, printing too many bills is rarely the problem. The reason? Actual physical banknotes are but a tiny fraction of the total amount of money in circulation.

    Think of it this way: How much "money" do you have? Not just the couple of twenties stuck in your wallet and the hundred you keep in a desk drawer for emergencies. But the cash in your checking and money market accounts.

    But what about the unused credit on your charge cards? Isn't that "money" too? If you wanted to buy something, you certainly could use it just like cash. The same is (or more accurately, was) true for the potential amount you could borrow against your house's value. So, banks and other creditors can actually "create" money just like the Government can. And if they "create" too much of it, ie. by extending too much credit, this too can lead to a situation where the "supply" of money exceeds the demand for it - or inflation.

    A very small amount of inflation (ie. around 1% or less per year) is generally thought of as an indication of an economy that is in balance. It suggests that banks and other creditors are lending enough that businesses and consumers can access to credit.

    On the other hand a situation where money is gaining value (ie. deflation) is actually much, much worse. It makes extending or taking on credit a much more hazardous proposition. Would YOU go out and buy a $500,000 house if you were pretty sure that it would only be worth $400,000 in a couple of years? And which bank would lend you money under those terms?

    Lesson: Economics is a complicated science. Don't get your instructions from Rush Limbaugh and Sean Hannity, because neither of them managed to finish college.
     
  6. jeremy h macrumors 6502

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    UK
    #6
    Phas3 - I guess you're in the States, so this link might not work for you but last night (on BBC r4) there was a super radio program here talking about whether we should go back to the gold standard. It was quite wide ranging and talked a lot about the 'value' (and otherwise) of paper money. If you can get access to it - I'd recommend it.

    Link to radio 4 - The Gold Standard.
     
  7. malman89 macrumors 68000

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    Michigan
    #7
    I think the real question is - does it matter? Who cares about the devaluing of the dollar - unless you travel/trade abroad extensively (I remember being in the UK Thanksgiving 09 and suffering 1.57-1.60 to the dollar, ouch).

    Better yet, is a weaker dollar a good thing? It makes the United States a cheaper place to invest, to build things, to create things, to hire workers. If we were once again double Canada and as strong/stronger than the Euro today, investments and work would certainly start flowing out when our increased costs hurt a foreign company's bottom line.

    Our dollar combined with increased costs of living in emerging markets is starting to offset those tremendous savings exporting and off-shoring labor brought 5, 10, 20 years ago.
     
  8. maflynn Moderator

    maflynn

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    #8
    Buying any imported products and we import more then we export means the cost of those imported products will be more then if we had a stronger dollar.

    To put it another way, my paycheck will not go as far it used too because stuff I need costs more.
     
  9. eric/ Guest

    eric/

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    #9
    Idk why you singled those two out, but beside thr what you said was pretty spot on. I wouldn't get economics info from anybody in the news.
     
  10. fireshot91 macrumors 601

    fireshot91

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    #10
    The Fed can do 3 things to control the money supply, and thus the value of the currency.

    Prints money - leading to a higher supply, and thus a lower value.
    Lowering reserve requirements (The amount banks have to keep inside the physical bank at one time, usually 10%) - Leading to more money being lent out, more "fake money", thus lower value.
    Buying Bonds - More money goes out to the public, lower value of dollar.


    That's only national. For international value, other countries could be getting higher and higher value, thus relatively, our value stays the same (Or even potentially goes higher, but not as rapidly as other countries), so the dollar depreciates.

    Other countries get higher value because of higher demand for their money. If interest rates domestically (In the US) are 3%, but interest rates in England are 15%, why would I put my money in the bank in the US? I'd convert to pounds, and go put it in a bank in England. So, demand for English pounds raise, and at the same time, the demand for dollars decreases, lowering the dollar's value, but raising the pound's.

    Business ventures are essentially the same as interest rates. If I can earn more in my business in a different country, I'd go there.

    I like macroeconomics much better than microeconomics :p.
     
  11. iJohnHenry macrumors P6

    iJohnHenry

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    #11
    People who skim money off the top, and don't create a damn thing.
     
  12. snberk103 macrumors 603

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    #12
    Interesting that everyone immediately assumed the US$ .... though I suppose the Federal Reserve bit narrowed it down a bit. :) I wonder if the Fed reference had been left out would people still assumed the US$? I think so....

    Is the dollar devaluing or are other currencies increasing their worth? Even if nothing fundamental changes in the US economy, other economies that are doing will see their currency rise. Since the current benchmark is the US$ it the appears the US$ is sinking.

    Also... don't assume a devalued dollar is necessarily a bad thing. Consumers may pay more for imported goods, but domestic manufacturers gain a price advantage when other currencies are valued higher.

    It's complicated for industries to cope with the swings though - they've got to stay nimble. Expand their exports when they the dollar is low (when they have a price advantage) - expand and modernize their infrastructure when the dollar is high (making the import of factory machinery cheaper) so that they can bring their costs down.

    Anyway.... don't worry about... the Canadian banks are buying up the US banks... pretty soon people will start trusting the financial system again and the currency will bounce back.
     
  13. avro707 macrumors 6502a

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    Dec 13, 2010
    #13
    I think that was a warning shot across the bow! Got to admit, it was pretty spot on, like the rest of the message.

    Here, we've got the opposite problem - our dollar is soaring, it's been above parity with the US Dollar for a long time, our interest rates are low (3.5%) and it still stays high (we do have a booming resource sector and generally strong economic conditions).

    The high dollar is bad for exports.
     

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