The Devaluation of the US Dollar

Back before 9/11 I traveled to Australia and it was a great trip. That country is amazing although I proved unable to consistently drive on the other side of the road. One item I remember clearly is that the Australians seemed to treat $50 Australian currency as if it were more like a $20 US currency item. They would get $50 Australian notes out of the ATM machines and frequently use them to purchase beer or other items at the bar. This is exaggerating a bit but not by a lot.

As you can see from this graph the US Dollar was worth almost twice as much as an Australian dollar at the time (around 2000) so this makes sense. Taking out a $20 Australian from the ATM wouldn’t buy you much if it was worth around $10 USD, so why not dispense $50 Australian instead?

Today the Australian dollar is roughly on par with the US dollar. Our currency has depreciated roughly 50% against the Australian currency over the last decade. That is an amazing slide.

While slightly tongue-in-cheek it isn’t too much of a stretch to think that this ATM I saw recently in Chicago is preparing for the continuous devaluation of the US dollar; someday instead of getting $20 USD out of the ATM you may get $100 instead; more likely we would go down the Australian route and start making $50 USD bills ubiquitous.

It is absolutely important to think about the impacts of the declining USD. I am not a currency expert and not talking about the policy changes that led us to this path but about the practical impact on ordinary Americans far removed from these sorts of currency gyrations.

In the grand scheme, if you are buying something and competing against the Australians (or Canadians, or Chinese, or someone with a Euro) you are going to have to pay a lot more US currency to buy that same item. Michigan Avenue in Chicago is swarming with tourists right now and I am sure a lot of them are buying up goods that seem like a huge bargain to them, paying in these foreign currencies. Dan and I were recently in a mall in San Francisco that was absolutely packed to the gills with people of Asian descent buying like there is no tomorrow. Why is this? Because their currency goes a lot further in the US than it does in their home countries.

Things that are denominated in dollars like oil, gold and US grains are soaring. There are many other reasons (such as the war in Libya) but in general if you price something in dollars and the dollar goes down in value the price goes up. If you own these commodities (or something that produces these commodities, like farmland) then you are going to make a lot of money.

On the other hand, expect foreigners to come here and snap up US dollar denominated assets like real estate and even whole companies since valuations are attractive to them. While this isn’t always a bad thing (it probably is going to bail out Florida real estate and suck up all those condos on the market, as well as California) don’t plan on winning a bidding war against a foreigner when your currency has lost half its value. This is just simple math.

Soon you will see ATM’s start to kick out $50 bills or maybe we will just jump to $100 bills. This is the wave of the future. And soon the Australians will come to the US and be confused about this, just like I was back before 9/11 on my trip to Australia.

Cross posted at Chicago Boyz

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