Posts Tagged ‘inflation’

The Value of a Dollar-It’s more than just 100 Cents

Wednesday, March 4th, 2009

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The value of our dollar depends strongly on the values of the dollars of other countries, exchange rates and interest rates. The interest rate in the United States from the Federal Reserve dropped to 4.75% in September 2007. Other banks around the world did not follow when this happened. This means that the European Central Bank (the home of the euro) has a higher interest rate right now than the Federal Reserve. Basically holding a Euro in your hand would be worth more in interest than holding a dollar in your hand. At this time in the dollar’s life, which would you choose?

Because of this difference in interest rate, other countries around the world are thinking like you and I are. They’re diversifying their holdings from dollars to Eruos and even British pounds for this same reason. In a supply and demand aspect, this situation causes there to be a large supply of dollars making them worth less. This loss in value caused the oil industry to charge higher prices, hence the skyrocket this past summer. Other countries don’t want the dollars they get for oil so they exchange them for Euros. It’s an endless cycle that has only gotten worse, despite understanding the root of the problem.

The dollar dropping is a double edged sword. On one hand, many manufacturers want to produce their products in factories in the United States, bringing us jobs. The reason manufacturers want to bring their factories here because it’s so cheap to run because of the low dollar value yet they can sell them overseas for the value of the Euro. On the other hand, the low dollar causes inflation. We know how bad that can be. Everything becomes more expensive in order to make up for the dollar value going down. Companies still want to make a profit on their goods so the cost of everything rises.

In order to get bonds to sell, they will be cheaper and have higher interest rates. These interest rates correlate to mortgage rates which don’t seem to be dropping anytime soon. Our weak dollar is also scaring away foreign investors who are now afraid to own stock in US companies. Foreign nations who have a lot invested in the dollar have the ability to cause a nuclear financial meltdown for the United States. They could easily exchange their dollars for something else, releasing our money into circulation, causing the value to plummet.

All in all, yes the dollar is worth 20 times less than it was in 1913 but a year or two ago, we knew that and we were used to it. Right now, on top of the 20 times less, it is losing more value in front of our eyes. I’m no one to give financial information but now that you know about the value of the U.S. dollar, just watch what you do with it. Buy and sell carefully because this is a delicate time for our economy.

Dollarization in Foreign Economies

Tuesday, February 10th, 2009

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dollarizationThe term “Dollarization” is when the inhabitants of a country use foreign currency along with (or in place of) their own domestic currency.  Dollarization is not only applied to usage of the United States Dollar, but generally to the use of any other country’s foreign currency as the accepted currency.  Some other currencies that are widely accepted outside of their issuing country of origin are:  the Euro, the South African Rand, the Russian Ruble, and both the New Zealand and Australian Dollars.  For today, however, we’ll focus primarily on the United States Dollar.

Dollarization has never really received much attention, due to the fact that it was generally believed to be politically impossible until 1999, when Jamil Mahuad (then President of Ecuador) attempted official Dollarization through economic reforms of Ecuador’s economy.  He declared a freeze on the country’s bank accounts, in an attempt to control inflation.  This economic plan ultimately lead to a military coup and Mahuad was ousted from office.

Since that time, there have been several other countries that have considered and implemented it as that country’s official policy.  El Salvador, for example, officially adopted the United States dollar in 2001.

Dollarization can fall into three basic categories:

1.  Official Dollarization:  The dollar is the only legal tender, officially adopted, and there is no local currency.  Some examples of countries where this has happened are:  Panama, El Salvador, and Ecuador.  Since their independence in 1903, for example, Panama has used only the United States Dollar exclusively.

This reduces the foreign country’s economic risk, providing a secure, stable economic environment.  These generally tend to be “developing” countries, with transitional economies, especially those with high inflation.

Amazingly enough, the United States Government does not have to provide approval to allow for another country to use its currency as legal tender.

2.  Unofficial Dollarization:  This occurs when private agents, generally in private transactions, prefer the foreign currency over the domestic currency. They might hold, for example, deposits in the foreign currency because of a bad track record of the local currency.  The practice might be widely accepted in that country, but is not classified as “legal tender” by the country’s government.

This can sometimes occur in countries where the United States Dollar has become more prevalent in circulation than the country’s own local currency.  This can be difficult to reverse.

3.  Semi-Dollarization:  Also known as a “Bimonetary System”, foreign currency is legal tender, but plays a role secondary to domestic currency.  Both the United States Dollar and the country’s own currency are used interchangeably.  Cambodia and Lebanon are two countries that practice this, for example.

There are both advantages and disadvantages to Dollarization for a country.

The advantages would be:  Fiscal discipline, resulting in lower inflation and financial stability.  This results in business being easier to conduct within that country, due to the resulting “peace of mind“.  The United States Dollar, for example, has never been devalued, nor has the United States’ notes ever been invalidated.  For a country that has had a past history of bank failures, devaluation and inflation, the temptation of adopting the United States Dollar is strong.

Some disadvantages would be:  Loss of control by the local government, as they lose power and control over inflation and fiscal policy.

It has been estimated that approximately 40-60% of existing United States currency circulates outside of the U.S.  This estimate has been further reinforced by the actions of the U.S. Government, which produced posters and pamphlets between 2003 and 2006, outlining the new look and anti-counterfeiting features of the “New” United States bills in an ASTOUNDING 24 LANGUAGES!

So, the next time you travel outside of the United States and encounter U.S. Currency, or even the next time you pull a Dollar out of your wallet, beaten and worn, looking like it has been “Around the World”, ask yourself:  Where has it been, What countries it has seen,  and how many different hands it has been exchanged through?

To find out where YOUR dollar has been, please visit our FREE Online Dollar Tracking System by clicking on “Enter a Dollar Bill” on the menu above!