Will the value of the dollar drop versus other currencies? I believe so. Why? Let me review the theory behind a currency in order to clarify the reasons why I believe the dollar is likely to drop. Later I will suggest ways for you to protect yourself against this probable devaluation.
There are three characteristics of money. It must act as a unit of account, a medium of exchange and as a store of value. Today, the dollar meets the first two criteria but it is lacking the third characteristic. It is not a good store of value for the following three reasons:
• Interest rates in the US are very low. This discourages investors from holding dollars. However, in the last few days we have seen interest rates spike very strongly; this is the way the market is saying we are not confident in the financial mess being created by Washington. In fact, as interest rates go up the value of bonds drop. The Ten-year notes have lost 10.3 percent this year, while 30-year bonds have lost an incredible 27.5 percent.
• We are in a recession. The prospect for near future economic growth is weak, so
• investors’ confidence in the dollar as a store of value is reduced.
• The federal government is running some gargantuan deficits. The numbers are mind boggling. As much as I feel President Obama may make some needed changes, I also believe his training and background make him ill suited to be fiscally conservative. I expect he will continue to spend rather than make necessary cutbacks.
Any of these reasons alone are not enough to reduce the value of the dollar. But all three combined create a powerful mix which will greatly devalue the dollar in the near future. Here’s my prediction: the dollar has a greater chance of falling in value relative to other currencies than it does of either maintaining its current value or increasing its value. Therefore, I believe it is a reasonable bet to sell some of your dollars.
What would I buy? I suggest the Euro, or the Yen, and/or the Canadian dollar. Gold might be an option, but I believe its price has gone up more quickly than the currencies I just mentioned, so these currencies will need to catch up. Thus, they are a safer bet.
For how long would I hold other currencies? I would hold them until I believed that interest rates in the US had raised enough to where it pays more to hold dollars than it does to hold other currencies. Higher US rates should strengthen the dollar.
If you need help with your financial planning or investing, please call me at (714) 771-6000 or send an email to professor@ulivi.com. I will be happy to set up a free consultation for you.