If the value of the dollar continues to drop, which is most likely, interest rates will need to rise or the dollar will continue to fall even further. For example, this week the U.S. currency had its biggest weekly decline since May versus the euro, falling 1.9 percent. It dropped 2.5 percent drop versus the yen this week too, its fifth weekly decline in the longest losing streak since December
What are the consequences if the dollar continues to drop in relation to other currencies? Those of us who are paid in dollars and have our assets in dollars will become poorer relative to our international counterparts. Also, the price of imported products will increase, and because we import so much, we can expect to see higher inflation rates, which will make us poorer yet.
Why is the dollar dropping? Because we have an incredibly large federal budget deficit, in addition to a huge trade deficit. And we have these twin deficits because we Americans are living way, way beyond our means. We are financing our excessive lifestyles by borrowing and borrowing, and foreigners are beginning to mistrust our ability to repay them. Unfortunately, they are right. To protect themselves, they are selling the dollar, which lowers its value and a vicious cycle occurs. The more the dollar drops, the more it encourages people to sell dollars to protect themselves.
What will entice them to continue to lend to us? Paying them more, which will mean raising interest rates. Of course, raising domestic interest rates encourages foreigners to continue lending to us, but it will slow the economic recovery. We are moving towards a quagmire.
Is there any good news in the dollar dropping? Yes, plenty of great news. As prices of imports increase, import substitution will kick in. This means American factories will increase their production, which will in turn lead to more employment. This will eventually lead to more domestic spending and higher tax revenues, which will result in a return to normalcy. But it will take a long time. In the meantime, how do you protect yourself? Call me so that I can review your portfolio and offer some suggestions. You can reach me at (714) 771-6000 or send an email to professor@ulivi.com.
Warm regards,
Professor Rick Ulivi, Ph.D.
professor@ulivi.com
Website: www.ulivi.com