Grandfather Economic Report series
| Home & Contents | Summary | Feedback | What's New | Link Index | Eye-opener | Must See |

Grandfather Foreign Exchange Report - Main Report -

by Michael Hodges (email) - July 2011
- a chapter of the Grandfather Economic Reports -

EROSION OF INTERNATIONAL ECONOMIC POWER

< Value of the U.S. dollar down up to 82% vs. our best-educated competitors >

This is the International Exchange Rate Report, a chapter of the Grandfather Economic Report series which compares economic and education trends facing our young, to past generations - - and gives graphic evidence that a strong dollar (not a weak dollar) and positive trade balances are in the best interest of families and their children.

- The first part of this page, the main exchange rate report, repeats part of the prior starter page - for emphasis -
it's then followed by other data graphics - - and links to other relative to this issue


How does such an unstable currency help citizens?

QUESTION

Should our children be proud that theirs is the largest creditor nation on Earth, while earning a hard currency with continually rising international buying power - - as it was when we were their age?

Or, be proud of today's reality > > being the largest debtor nation on earth and earning a weak currency, with a long-term erosion in international buying power up to 82%.

Based on exploding trade deficits and debts, is the US dollar threatened to repeat past long-term declines?

And looking forward, does the European currency (the Euro), issued in Jan. 2002, pose a future threat to the dollar, and therefore to relative U.S. living standards and national security?

Does the Yen also threaten, considering Japan's positive trade balances and strong internal savings vs. horrendous negative balances in the U.S.?

 

exchange ratesThe left chart again shows the dramatic negative trends of the U.S dollar vs. the currencies of several industrial trading partners - - a drop up to 74% in the dollar's international buying power - past 39 years.

In the years1997-2001 there was a dollar up-tick, which was not sustained. Note the dollar's 2002-2011 down-tick - - an apparent resumption of its long-term downward trend line.

Up until 1971 the U.S. was on the gold standard, meaning that it promised to exchange a fixed amount of gold for any paper dollars presented to the treasury department. This meant it agreed to exchange to foreigners, but not to U.S. citizens who at that time were barred by law from owning gold. In the late 1960s more and more foreign central banks, being concerned about the future of the U.S. dollar due to trade deficits, demanded gold for its holdings of dollars. At first the U.S. complied, honoring its commitment, but as the foreign request for gold exchange accelerated - - finally in 1971 the U.S. government notified all that it would no longer honor its past commitment to exchange gold for paper dollars. See the chart's note for 1971.

Therefore, U.S. dollar gold standard ceased to exist and the US dollar became a fiat currency that can be produced at will by the United States, not backed by anything of intrinsic value

During these 40+ years Americans became more consumptive spending, more debt-dependent, less savings-oriented or supportive of internal manufacturing and exports. In order to support that addiction the international value of the U.S. dollar currency declined dramatically over the period, due to soaring negative trade balances.

Many times during this period U.S. government officials allowed (even encouraged) actions helping cause this situation, believing a weak dollar would turn trade deficits into surpluses. They were actually engaged in competitive devaluation of the currency we pay our workers. They were wrong, and negative trade balances exploded and the U.S. manufacturing base faltered. Finally, starting in 1997, Treasury officials voiced (vocal, only) support for a strong dollar which, together with uncertainty concerning changes in the European Union and its new currency (the Euro) and Asian currencies, helped the dollar recover a bit from years of decline (see chart).

But history proves that just a couple years upside does not assure future strength and buying power stability, unless negative trade balances are reversed.

In fact, although the dollar experienced an up-tick in the past several years U.S. trade deficits still soared to even new all-time unsustainable records each year - - as shown in the International Trade Report graphics - - and the new Euro currency started to circulate January 2002.

This shows the U.S. must do more than 'talk-up' the dollar and play change the measurement criteria with statistical wizardry for GDP, inflation and productivity to make the economy appear better than it is, but the nation must reverse its trade imbalances, reduce soaring private sector debt ratios, and reverse negative private savings ratios strong to the upside. So far there is no evidence of such.

By the way: the period of declining dollar values shown in the graphic's first 25 years was the same period of stagnant and falling U.S. median family incomes (adjusted for inflation) and savings, as reported in the Grandfather Family Income Report, declining education productivity & quality, declining productivity, soaring social spending and soaring government debt ratios.

And, this period was preceded by government spending growing much faster than the total economy, steadily reducing the share of the private sector, as government mandated regulatory cost ratios climbed. America became less strong and less competitive.

The long-term performance of our currency is our fault (negative trade balances and soaring private sector debt with zero savings)


It cannot be blamed on other nations

It should be unacceptable to pass to our young an economy, which not only provides stagnant real family earning power and a difficult living standard in dollars, but a currency with a long-term history of devaluation in its international store of value, against children of other major developed nations.
We feel increasingly poor when traveling in the world outside America because of our currency, compared to the experience of prior generations. Several generations ago, the U.S. dollar was king, and the one who earned dollars felt like a king when he traveled. No longer.

How does such a decline in the value of our currency help our youth?

QUESTION:

HAS THIS 'CUT' IN PAY HELPED US BETTER COMPETE INTERNATIONALLY

ANSWER:

NOT IN PRODUCING A POSITIVE BALANCE OF FOREIGN TRADE
IN COMPETITION WITH OUR FOREIGN FRIENDS

Now, note how the nation's trade deficit worsens on a similar trend as the worsening shown above for the dollar's exchange rate.

The following chart shows our terrible merchandise trade performance.

trade balance totalThis represents the deficit in said trade in goods (the net of imports and exports).

The U.S. is setting record negative trade balances each year since 1992. In 2010 it set a near all-time record with a trade deficit of $647 billion, up 28% over prior year - despite a rapidly falling U.S. dollar exchange rate.

Note that the chart went negative (deficit) first in 1971, came back a bit, then plummeted from 1976 to 1999 - - 3 decades of increasingly negative performance. (the dashed red curve is the computed trend-line of said performance).

The first chart on this page showed that our cost of doing business was cut by up to 82% vs. Swiss franc and 79% vs. Japanese Yen - by devaluing our currency, and the charts above showed the international value of our pay checks were reduced.

Why did our trade balances got worse, when we were told they would get better?

Obviously, the trade balance has not turned around to a positive balance either via reducing the value of the dollar in the past, nor in some alleged 'productivity' increases.

Who invented such thinking?


Considering the 82% reduction in the foreign value of the dollar, which effectively reduced our international cost of doing business - - why does our trade balance continue negative - - producing higher and higher deficits?

These charts prove that the weaker we allow (or encourage) our currency to become, the weaker our balance of trade. See the Grandfather International Trade Report on Foreign Trade & Reserves.

In the meantime, the U.S. economy is now more dependent on foreign trade, than ever before in its history - - yet, more of its citizens are less prepared for successful participation in a global economy than those of other nations.

AND, none of this has helped our debt situation, according to the Grandfather Debt Report

Note below how the decline of a measure of the U.S. manufacturing sector also follows the decline shown in the above charts of foreign exchange value of the dollar and trade balances.

mfg-worker.gif (4051 bytes)Decline of the Manufacturing Base

If the U.S. had adequate productivity then why should its manufacturing base shrink - - instead of grow?

How can America ever export enough goods to other nations to balance its negative balance of trade of soaring merchandise imports if it has a declining manufacturing base?

The left chart, from the Family Income Report chapter about stagnant income growth, shows the trend of the number of manufacturing workers as a percentage of all U.S. employees (non-agriculture) - - from 26% in 1960 to 10% in 2004, a 60% drop in the manufacturing ratio.

On a GDP basis the same negative trend occurred > the U.S. manufacturing base declined from 30.4% of GDP in 1953 (when we had a trade surplus) to 12.7% in 2003 - a  58% drop in the manufacturing share of GDP - and more of the remaining manufacturing base is foreign-owned than before. (Bureau Economic Analysis, Economic Report of President appendix table b-12)


Note also another similar trend - - the following chart showing the purchasing power of the dollar internally, signified by internal inflation rates, declining just like the exchange rate first chart on this page.

inflation.gif (6116 bytes)PURCHASING POWER EROSION

If the U.S. produced adequate productivity the internal purchasing power of each dollar should rise. Why, instead, does its buying power fall each year?

This chart, from our Inflation Report chapter, shows an 89% reduction in the value of a dollar (its internal purchasing power) since 1950, where a dollar of 1950 is worth but 11.5 cents today - based on the consumer price index (CPI).

For this chart, the average annual inflation rate since 1950 was about 4%. To some people 4% doesn't sound like a big number. But, compound 4% over 50+ years and the 1950 dollar is worth but 11.1 cents today - - as seen in the chart.

(Compound it out another 50 years into the future, when today's 15-year old will retire, and the value of today's dollar will be worth just 12 - - another 89% plunge - - bringing it to a value of just 2 cents when compared to the 1950 dollar.)

 


natdebt-vs-natincome.gif (7220 bytes)EXPLODING DEBT - $57 Trillion and zooming

The economy is 2-3 times more debt-dependent - -
with $36 Trillion DEBT EXCESS compared to prior debt ratios

Here's one of the data graphics shown in the chapter called America's Total Debt Report

This is A SCARY CHART - showing trends of total debt in America (the red line, reaching $57 trillion in 2008 vs. growth of the economy as measured by national income (blue line). (adjusted for inflation).

Which line goes up faster, the red debt line or the blue net national income line?

Answer: the red debt line.

And, that debt line is going up faster and faster than national income! Right?

NOTE > From the above charts we have noted the long-term downward trend of the foreign exchange value of the dollar, is similar to the downward trend of the purchasing power of the dollar internally (inflation) as per the cost of living index, which is similar to the trend of the nation's trade balances (expanding deficits) as well as the trend of the manufacturing base - ALL INVERSELY PROPORTIONAL TO THE TREND OF DEBT EXPLOSION IN THIS GRAPHIC.

For an eye-opener to more understanding of this DEBT MONSTER - - see >
(1) a simple summary table of all debt in America, by sector > Debt Summary Table
(2) one of the most popular reports anywhere of trend graphics telling the story of private & govt. debt >
America Total Debt Report
(3) an award-wining report of federal government debt-only, with many historic trend graphics > Federal Government Debt Report


vs. the Roman Empire

"For the last hundred years, the dollar has lost value faster than the decline of the Roman era Dinarius after the reign of Nero. This is not surprising. Roman coins had silver or gold in them. In order to make the coins less valuable, they had to reduce the precious metal content. People didn’t like it. The dollar, by contrast, contains no precious metal. Not even any base metal. It is just paper. It has no inherent value. There is nothing to take out, because there was never anything there in the first place. Over time, the dollar is almost certain to revert to its real value - which is as empty as deep space." - Empire of Debt, a 2005 New York Times Bestseller


EDUCATION IMPACTS

The Grandfather Education Report documents that today's primary & secondary public schools are not preparing students for the economy of tomorrow as well as it prepared prior generations to meet the demands of yesterday - - despite rapidly increasing inflation-adjusted spending per student by public schools.

Not so with foreign students. As shown in the chart at the top of this report, the declining U.S. dollar made it easier for foreign students to attend U.S. universities. The sharp jump in the value of foreign currencies relative to the US dollar has greatly increased the number of foreign students with financial ability to study abroad without debt, compared to U.S. students who require more debt than ever for higher learning. A weak dollar driving increased foreign student demand may be one of the forces inflating university tuition, and thereby requiring more debt by American students. For U.S. students to consider studying abroad to broaden their learning and preparation for competing in the global economy, the weak dollar diminished such opportunities - compared to prior generations.

These forces have had a significant impact on the opportunity to acquire professional education in the important science, math and engineering categories - even in the U.S. The Grandfather International Education Report shows about half all new doctorates in these important disciplines graduating from U.S. universities are foreign students. The lower cost to these students (due to the higher value of their home currencies), coupled with better foreign high school quality and support from their home countries, prepares these students to dominate science & engineering, and to therefore easier qualify for near-free graduate school funding via research & teaching assistantships from our universities. According to the 1993 National Science Board study, 80% of foreign graduate students are in this category of funding.

Because their currency has been stronger than ours, and their education systems more focused on math, science and language quality, foreign students may have a better chance to develop scientific careers in research, engineering and university teaching than American citizens, compared to prior generations.

Just as our trade balances became worse despite a weaker U.S. dollar, so has our relative performance in educational opportunities in important technological-oriented disciplines that will shape tomorrow's global economy and national security.

THE EURO - short-term help for dollar, but long-term danger?

The European Community (EU) moved toward a unified currency in 2001 (called the EURO), as most European nations joined together and add another level of centralized governmental bureaucracy in Brussels to tie their joint 'economic knot.' In the short-term to 2001, this might have presented uncertainty in the minds of many who previously viewed the German & Dutch currencies as 'hard money' - due to their past appreciation records relative to other weaker European currencies - such as Italy, England and Spain - - and the dollar. Such uncertainty may in the short term cause a 'flight' from such formerly hard currencies to the U.S. dollar - especially as long as the U.S. stock market performs. This might have resulted in a temporary boost of the foreign exchange value of the dollar. The U.S. should not take such as a signal that our economy is 'well', but should use this possible lull as a great opportunity to get our own house in order - and prove that we can become more productive internationally by eliminating our negative balance of payments (see Trade Report) - - by reducing regulations that hamper U.S. competitiveness and reduce our reliance on debt (see America's Total Debt Report) - and, by taking actions to reduce internal inflation below what might be the case had the dollar not strengthened - - and, with inflation rates well below that of our major, hard-currency trading partners (Japan and Germany), as shown in the Inflation Report.

As Europe continues to build-up the European Union bureaucracy, with even more centralized planning, the U.S. should go in the opposite direction and strengthen our economy by REDUCING our federal & state/local government spending ratios to increase the share of our economy represented by the 'pure private sector' - - such that when the Euro smoke clears, we are in an improved position relative to all international trade and currency strength, not in a potentially weaker and threatened position. As Europe more centralizes, the U.S. should more downsize & decentralize government. For a dramatic, seldom-seen long-term color graphic on government spending-dependence of the U.S. vs. other major nations, and a discussion on decentralization, see the International Government Spending Comparison Report.

We must keep in mind that the German-backed Euro, representing a larger combined economy & population than America's, can pose a major future threat to the future U.S. competitive position and living standards - and to the long-term strength of the dollar and its international reserve status. And, the Euro may offer Japan a major alternative currency in which to 'park' its huge international reserves now 'parked' in U.S. dollars - - such potentially offering major challenges to the U.S. in its ability to finance its internal and external debt in the future - - thereby possibly negatively impacting future living standards of U.S. citizens. The Federal Government Debt Report shows that foreign entities control nearly 40% of our outstanding federal government debt, up from but 20% several years ago, which should serve as notice to reduce the principal amount of our total outstanding debt principal.

The U.S. must take action to get its own house in order by reducing its government spending ratios and regulatory restraints. If not, the competitive threat of the Euro may escalate to the point where America, like so many other current sovereign European nations driven by 'fear' to join the EU, will feel compelled (or self-brain-washed) to either take restrictive trade measures or give in to Europe and ask to become a member of a single world currency. In the view-point of this writer, such would accelerate the U.S. march along the road to serfdom - - with loss of its national sovereignty, its own currency, and individual freedom of its citizens. The author is concerned that some big-government advocates wish such an outcome.

A WARNING: M.I.T. economist Lester Thurow, 1996, ("the future of capitalism, pg. 149): "If the Euro had been in place in 1995, it would probably have replaced the dollar as the reserve currency of choice in world trade - as in the aftermath of the Mexican crises people wanted out of dollars but had no other place to go. One can make a strong case that Americans should do what is necessary at home and abroad to preserve the value of the dollar and to maintain its role as the world's reserve currency of choice. If it loses its position, America loses much of its freedom of action - - and America could run out of foreign exchange reserves, and find the rest of the world dictating its internal economic policies. But Americans aren't going to act."

so - - what happened in 2002 to early 2008?
Answer:  a sharp depreciation of the U.S. currency.

The US dollar is down 58% vs. the Euro during the 7 years, and also down against many others incl. 30% vs. the Swiss franc and 20% vs. the Canadian dollar. Regardless of the impact of U.S. stock, bond, real estate or commodity markets in the end most Americans think of their assets in terms of dollars, yet few recognize that a huge international depreciation (write-down) of those assets is again in progress - - and there is little most know what to do to protect themselves. Just think, for every 100 thousand dollars of a citizen's assets the international buying power dropped $58,000 the past several years vs. the Euro. Not only does that wipe-out incentive for foreigners to invest in dollar assets to help finance America's savings-short, deficit economy, it negatively impacts the store of value of U.S. citizen savings and effectively causes a huge decrease in the international value of U.S. wages.

In the past several years many average citizens experienced large decreases in the dollar value of their stock market assets, due to huge market declines of a bubble economy that was pumped-up by soaring debt and erroneous claims. Many more conservative citizens, who stayed away from the market pounding to protect their savings, at least came out with their assets in tack but were later horrified to witness interest earnings on their assets chopped 60%+ during 2001-2004 as the Federal Reserve, trying to promote even more debt in the debt-laden economy, forced interest rates to record low levels. On top of this comes the huge depreciation of all dollar assets in terms of its international-value, as the dollar dramatically falls.

In late 2008 and 2009 one notes the Federal Reserve has squeezed down interest rates in unprecedented moves, to promote more debt-based consumption and further subsidize debtors which, of course, decimates those who have saved.

All of this leaves the too few US savers (incl. a lot of seniors) vulnerable and devastated, wondering who represents them and why are powers-to-be making war on savers instead of on debtors.


A 2005 Challenge by a Leading Holder of U.S. Dollars > China

In remarks made January of 2005 at the World Economic Forum in Davos, Switzerland, Fan Gang, the director of China's non-governmental National Economic Research Institute, said that "the U.S. dollar is no longer seen as a stable currency."

Now that's something to think about !!


what happened in 2006-07?
Answer:  a sharp 14% depreciation of the U.S. currency
against other currencies and a 60% depreciation against gold.

"The consequences of a rapidly declining dollar are not yet fully understood by the American public. The long-term significance has not sunk in, but when it does there will be political hell to pay in Washington. Our relative wealth as a nation is measured in dollars, and the steady erosion of the value of those dollars means we will all be poorer in the future. The artificial stimulation of our economy through cheap money comes with a price. When dollars are abundant, they are worth less. This is the reality facing Americans today." U.S. Congressman Ron Paul, May 2006.

The following chart depicts the 12 months to December 2006 for the NYBOT dollar index. Click on the chart for its update.

dollar-index.gif (8802 bytes)

Click this chart for most current data plots - chart source > http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12

 

and what happened in 2007?
Answer:  the sharp depreciation of the U.S. currency continues south.

The next chart includes the trade-adjusted U.S. dollar index Nov. 2006 to Nov. 2007

dollar-index-2.gif (8215 bytes)

Source: http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12

Not a very nice picture regarding U.S. dollar's
international purchasing power

- and, in the beginning of 2008 declined even further,
followed by a rebound at beginning of global financial crisis,
BUT Spring 2009 to 2011 a sharp down-turn once again

click here for current trend graphic


BOTTOM LINE

There is obviously something very serious about a combination of the structure of our economy and our thinking priorities. We act too much like we do not want to compete - - and prefer to hide behind protective barriers - - rather than reduce the big-government thinking in our nation and reduce its spending ratios.

The author submits that this type of thinking can often be expected of government officials, who themselves do not have to compete for their livelihood in the private sector, let alone in the international arena. Their mentality is one of believing they can win long-term via international negotiation, pressure, quotas, 'voluntary restraints by trading partners, or regulations. They are dead wrong. We have allowed more and more of our economy to fall under control of government dominance - - as seen in the Government Spending Report. We have allowed ourselves to become so dependent on government spending internally, that we are seduced into wishfully thinking that bureaucrats can also protect us from foreign competition. Gullible, we are.

The 'Grandfather Education Report' shows the more money we pumped into education (without insisting on free competition between all types of schools - public and private) the less the focus on learning, and the less quality it purchased - - compared to prior generations and to foreign nations (see International Education Report). This foreign exchange report and its companion, Grandfather Trade Report, demonstrates the more we allow (and sometimes encourage) the devaluation of the dollar, the worse our trade balances - - because 'wrong-thinkers' believe we can hide behind a weaker dollar and not compete. What they are not telling the American people is that their plan results in a reduction in the international value of the wages of American workers, as a cover for not reducing government spending and power. That's not competing, that's cheapening our labor.

During the period of foreign exchange loss of the dollar, and the decline in our education productivity and our trade balances - - we have realized stagnant and falling family incomes and savings as reported in The Grandfather Family Income Report - - and. soaring debt ratios in all sectors as proven in the America Total Debt Report.

Playing such money games does not resolve structural problems in our economy. Government must stand aside (reduce its share of our economy to increase the share of the private sector (as in the Grandfather Private Sector Report), reduce the ratio of government mandated regulatory costs (see the Grandfather Regulation Cost Report), rein in the power of the federal reserve system to manipulate interest rates that drive debt-debt, and allow the free market to determine the best allocation of resources.

" Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value.  We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros," Feb. 2006 'The End of Dollar Hegemony', by Congressman Ron Paul of Texas to Congress. Note - this is a good history of the dollar. http://www.house.gov/paul/congrec/congrec2006/cr021506.htm

Our nation should have a policy of a strong U.S. dollar, and take those actions necessary to assure that end. Nobel laureate economist Milton Friedman said, "The only way to strengthen the dollar abroad is to strengthen it at home. And fundamentally there is only one way to do that: not by talk, not by promises, not by cosmetic borrowing abroad, but by less government spending and less creation of money (debt)."

At the very least, our economy must not offer less economic potential via the international value of its currency, than realized by prior generations of Americans, or less than the youth of foreign nations.

What are your thoughts about this ?

Do families and our young generation deserve better future trends ?


It is now recommended that you read the INTERNATIONAL TRADE REPORT - with dramatic color graphics


Or, To HOME Page of Grandfather Economic Reports, with the table of contents of the series of reports of many other threats facing the economic future of families and their children, compared to prior generations - from debt to family income to education quality.

Exchange information with Michael Hodges via E-mail

Go to the top

| Home & Contents | Summary | Feedback | What's New | Link Index | Eye-opener | Must See |

Copyright 1997-2011 Michael W. Hodges. The Grandfather Economic Report series is the intellectual property of its author; all rights reserved under Copyright Conventions. Permission to redistribute all or part of this series for non commercial purposes is granted by the author, provided the associated web page address is included and full credit given to the Grandfather Economic Report and the author, Michael Hodges. Notice appreciated via email.