Why the dollar is falling
by Shannon Clark
For most of my life the US dollar was strong, the exchange rate with other currencies changed but did so normly only to a small degree, minor shifts for the most part and if there were dramatic shifts they tended to be due to a crisis in the other country, not on the part of the US. The Dollar was worth more than a Canadian Dollar, the Pound was worth more than a US Dollar but typically only about $1.50 or so, and when it was first launched, the Euro was worth less than the US Dollar (I should have invested in Euros as rather quickly it reached parity with the US Dollar).
But in the past year, the US Dollar has fallen, fallen considerably and dramatically and seemingly there is little end in sight. The Canadian Dollar is now at least at parity and is with increasingly frequency worth more than the US Dollar. The Euro is now worth considerably more than one US Dollar.
As I write this $100 US is worth about 50.5 UK Pounds or about 64.75 Euros or about 102 Canadian Dollars.
On the eve of 9/11 a US Dollar was worth 1.10 Euros, today it is worth 64.75.
To put this in another way, on 9/11 if you earned $100,000 a year the equivalent income in Europe would have been $110,000. today an income of 110k euros would be $170,000 US at today’s exchange rates.
Someone who in the US earned $10,000 a month in 2001, would have had to earn 11,000 euros. That same 11,000 euros would now be the equivalent of earning $17,000 a month here in the US. That’s the same as getting an extra $7k a month, or roughly speaking getting a 70% pay raise.
70% if nothing else had changed, if you had started at the same salary in 2001 but decided to get paid in euros not US dollars and hadn’t gotten any raises in that time.
So what has happened? Why has the US Dollar fallen so much, so quickly and with for the most part little awareness on the part of the general US citizens?
There has been a similar, but not quite a dramatic change in the exchange with the UK Pound. Someone who had earned the equal of $100k US in Pounds in 2001 would now have a dollar equivalent salary of about $125,000.
In the case of Canada in 2001 the US Dollar was worth over $1.55 Canadian, someone earning $100k in the US would have had a Canadian salary of $156,000 Canadian. At current exchange rates that would be about $152,000 US, though earlier this year the US Dollar had fallen to as low as being worth $0.90 Canadian.
The change over time is not quite a dramatic against the Japanese Yen, from a dollar being worth 120 Yen in 2001 to being worth about 100 Yen today.
The US Dollar to Israeli Shekel has fluctuated widely since 2001, in 2001 $100k US would have been about 430k in Shekels, now that same level of earning would be about $125k US.
In short for most of the current century everyone in the US would almost certainly have more buying power had early on in this century they had gone to work someplace outside of the US and earned in a currency other than US Dollars. Comparatively speaking people who were at nearly par in terms of levels of earning and income in 2001 have now moved into very different levels of income and buying power.
This is always a bit tricky, to a degree there are other factors that have to measured, better than gross income is likely a comparison of actual take home pay, though since taxes in many countries of the world help cover health care costs unlike here in the US (but here in the US many people receive health insurance and other benefits from employment that don’t show up as earned income) full comparisons are complicated.
But to keep it relatively simple in most cases US incomes on the world stage buy far less today than they would have just less than 7 years ago. Nice (very nice) new car for cash less in most cases.
However though we’re entering into a tough year perhaps, if the financial press is to be trusted, for the most part few parts of the typical American life have gone up by a comparable amount. Gas prices at the pump have risen, here in San Francisco they currently are hovering around almost $4 a gallon for premium, but that continues to be a couple of multiples cheaper than in most of Europe and earlier this year they were down closer to $3.00 though at around these prices about a year ago as my old post shows. In my lifetime the price of gas has gone up considerably, when I had my first car over 16 years ago I recall some days when gas was $1.00 a gallon or less, but that was rare.
Since 9/11 however and even before then the US has been taking a wide range of steps, accelerated since 9/11 which I think are at the root of why the US Dollar has been falling relative to other major currencies. In combination these steps plus a marked decrease in the competence of our government and how it has managed our economy have combined to make the US Dollar something fewer and fewer people want to rely upon as the unit of transactions or the measurement of wealth.
Here are a few of the steps and why I think they have reduced the collective buying power and wealth of the US. And yes, here is where I will start introducing a “networked economics” perspective to this discussion. I’ve been blogging and writing from this perspective for a few years now, here is a post on the value of “used” markets for just one example.
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ame
- Much greater friction at US Borders. To visit Canada or the US used to require a drivers license, now it requires a passport. Visiting the US as a tourist was routine for most of the world, now it requires far greater friction, potentially fingerprinting and a much slower and more stressful process. Entering for business, not just tourist reasons has also gotten much harder. In just the past few months major musicians and authors of recently published books have been prevented from entering the US due to “morals” clauses.
- Slow to non-existent visa process has reduced foriegn engagement with US Universities. When highly respected, tenured tracked professors are denied a US Visa (Tariq is instead teaching at Oxford), when scholars are denied entry to participate in major academic conferences being held in the US, we have a serious and growing problem. And as a result schools have trouble attracting and retaining foreign graduate students, and post-graduation those students have more difficulty in getting US work visas.
- Combativeness of US Government both literally in terms of waging two active wars (and a range of other actions across the planet) and more figuratively in terms of enforcement of trade rules and barriers. By withdrawing from countless global treaties (and/or refusing to even negotiate) from Kyoto to the Geneva Convention. Increasingly the US is taking positions on a range of issues that are counter to those of our trading partners - from genetically modified foods to whether or not we trade with Cuba. And we are maintaining trade policies that result in very strange policies - our tariffs on sugar which result in the mass use of corn syrup in US packaged foods to cite just one of many examples (though one of the more egregious). And increasingly we seem to be seeking to force our laws onto the rest of the world - trying to tie our (highly debated) lengthy and particular copyright rules to WTO negotiations.
ame
ame
And there are many other examples.
As a result of all of these factors I think the US in the past decade has become more isolated, more closed to the outside world even as the rest of the world (Europe in particular) is growing less isolated and more connected. The “eurozone” is now far larger than the US. When it is hard to engage with the world - both for US citizens and for non-citizens with the US the result is a much lessened need to use US dollars for those interactions, a much lowered attraction to using dollars.
And that, more so than a public call for a “strong” dollar (as some recent WSJ opinion pieces have called for, ironically by a Bear Sterns economist) is why the dollar has been and continues to fall - the US is decreasingly relevant as a global market and participant because we have increasingly chosen to make it very hard to do business with us, to even engage with us to start to do business.
When we seek to impose our morality on the world - having a “morals” test for even short term work visas, such as for a musician to perform at the Grammy’s something is seriously wrong. When our government seemingly is making political judgments about who can teach even at private universities we lose much more than just an academic voice - whether or not you agree with that particular voice we are shutting out a reasoned engagement with the world.
From a networked economic perspective a unit of currency is a link - a link to that issuing central bank. Using that currency either directly or indirectly (by choosing to engage in trade and contracts denominated in that currency) is embedding a link to that central bank into those transactions. Both parties do so when they feel comfortable with that relationship for the duration of their transaction. With all the barriers we are imposing to engage with us, and simultaneously as we continue to diminish what we sell to the world, we reduce considerably why various people would choose to lock up a relationship with our central bank for a long time.
In short as we erect physical barriers, legal barriers and cultural barriers to engage with the rest of the world we are removing nodes at a rapid pace who might choose to conduct business denominated in US dollars.
For more on my theories of Network Economics, see my blog, Searching for the Moon.
