This particular diatribe is inspired by the current euro:dollar battle mixed with the dependency on inflation and interest our money system has.
Take a look:
http://finance.yahoo.com/q/bc?s=FXE&t=5y&l=on&z=m&q=l&c=
Of course this URL is relative to the current day, so use the date range: 4/23/03-4/23/08 to see the numbers I am starting with. FXE started though only 28 mos. ago so that is all you should see data for.
For those who don't know, FXE is the symbol for the Euro Currency Trust account traded on the big exchanges. Basically by buying shares of it in dollars, you are buying euros. So one need not go to Forex.com and waste money on commissions just to get into euros. Since just the inception of the FXE trust, the euro has appreciated against the US Dollar an average of 1.3% per month, over 26 months.
FXE exchange: $120 in Jan ‘06 --> $158 in Apr. ’08
Well it was worse in post-WWI Germany but for the US, it’s still pretty bad!
But to get a more detailed range, go to http://www.oanda.com/convert/fxhistory (Open this in a new window so you can look at the data and keep reading this here piece of economic brilliance!)
Back on 4/23/03 it was .91 EUR:1 USD. Today it’s .63:1. Over 5 years, the dollar has lost the equivalent of .28 of a euro in value as compared to one euro. Think about this. If the trend continues, the USD will be worth nothing as compared to one euro-- in about another 12 or so years. Over 5 years then, or 60 months, the USD has lost on average .6% (or .6/100) of its value per month against the euro, calculated progressively. The big picture though is this: Over 5 years, it has lost nearly 31% of its 2003 value.
Whew, that's a lot of Gitanes and souvenir fake crown jewels, not to mention hotel stays and gorgeous views of the Riviera. [Trans-Atlantic tourism cannot be doing well as a result, at least not for overfed, loud Americans in funny shorts. Do you think the French miss us? I think so. I think aside from tourist dollars (euros), they got a vicarious kick out of watching fat middle-aged Americans look clueless and ask for directions in a totally wrong language. I mean, the entertainment value itself is priceless, and they got all that AND made a living off of it!]
Now of course we know this falling-to-zero-value is not going to happen. But it should give you some idea of just how fast and dramatic the drop has been. A .6% progressive depreciation per month doesn't sound like much until you watch it go for 60 months. Now you're talking turkey.
It's worse though when you look at just the last two years, 2006-2008, just 3 months less than the life of the FXE trust. The rate of depreciation of the USD v EUR has been increasing over the past 2 years.
But even if you just look at just the last 5 years and ignore the higher rate occurring over the last two years, a roughly 7%/yr. appreciation vs. the USD of any currency over just 5 years is not good news. It’s almost unheard of. In fact, I think it may be. [Possibly the 1970s saw something akin to this but that was for different reasons, I believe, and none having to do with either faith in the currency or the “petrodollar effect”.]
Bear in mind too I am not including inflation as a factor since the euro is also a fiat currency. Recently the euro’s inflation rate has been very high, almost 3%, and while it seems like it would make sense that this fact undercuts its value, and indeed it may well do so for consumers in Europe, it boosts its value v. the USD for a lot of weird and esoteric reasons. But the net result is the same for the average American consumer: If you were in Europe sitting there with a bunch of AmEx traveller’s checques, I’d suggest you exchange them for local money ASAP, as they are just sitting there in your passport case losing buying power.
But what does this have to do with the US? Well, we buy stuff from and via European nations. If their money is worth more but what folks there are getting paid (or businesses able to buy) is staying the same vis-a-vis the actual currency they have, their money is in essence worth more than ours, so they are charging more today than yesterday, even though the nominal prices stay the same, in order to make profit—or else not sell to us if we can’t meet the price. So if they cut their prices, they lose their margins, and of course, we hurt, since we already are stressed to afford whatever it is they are selling, and not getting the stuff we want. Strangely then, as recent history with the Chinese yuan has shown, it can often be to a country’s advantage in a sense for its currency to be less valuable that that of its trading partners. However for the individual citizens within the country? Well, things not so good from that point of view.
OK, so now that I have ruined your day, keep reading, as I am finally getting to my “Magnum Opus”, posted on Sunday... read the next entry below...
Take a look:
http://finance.yahoo.com/q/bc?s=FXE&t=5y&l=on&z=m&q=l&c=
Of course this URL is relative to the current day, so use the date range: 4/23/03-4/23/08 to see the numbers I am starting with. FXE started though only 28 mos. ago so that is all you should see data for.
For those who don't know, FXE is the symbol for the Euro Currency Trust account traded on the big exchanges. Basically by buying shares of it in dollars, you are buying euros. So one need not go to Forex.com and waste money on commissions just to get into euros. Since just the inception of the FXE trust, the euro has appreciated against the US Dollar an average of 1.3% per month, over 26 months.
FXE exchange: $120 in Jan ‘06 --> $158 in Apr. ’08
Well it was worse in post-WWI Germany but for the US, it’s still pretty bad!
But to get a more detailed range, go to http://www.oanda.com/convert/fxhistory (Open this in a new window so you can look at the data and keep reading this here piece of economic brilliance!)
Back on 4/23/03 it was .91 EUR:1 USD. Today it’s .63:1. Over 5 years, the dollar has lost the equivalent of .28 of a euro in value as compared to one euro. Think about this. If the trend continues, the USD will be worth nothing as compared to one euro-- in about another 12 or so years. Over 5 years then, or 60 months, the USD has lost on average .6% (or .6/100) of its value per month against the euro, calculated progressively. The big picture though is this: Over 5 years, it has lost nearly 31% of its 2003 value.
Whew, that's a lot of Gitanes and souvenir fake crown jewels, not to mention hotel stays and gorgeous views of the Riviera. [Trans-Atlantic tourism cannot be doing well as a result, at least not for overfed, loud Americans in funny shorts. Do you think the French miss us? I think so. I think aside from tourist dollars (euros), they got a vicarious kick out of watching fat middle-aged Americans look clueless and ask for directions in a totally wrong language. I mean, the entertainment value itself is priceless, and they got all that AND made a living off of it!]
Now of course we know this falling-to-zero-value is not going to happen. But it should give you some idea of just how fast and dramatic the drop has been. A .6% progressive depreciation per month doesn't sound like much until you watch it go for 60 months. Now you're talking turkey.
It's worse though when you look at just the last two years, 2006-2008, just 3 months less than the life of the FXE trust. The rate of depreciation of the USD v EUR has been increasing over the past 2 years.
But even if you just look at just the last 5 years and ignore the higher rate occurring over the last two years, a roughly 7%/yr. appreciation vs. the USD of any currency over just 5 years is not good news. It’s almost unheard of. In fact, I think it may be. [Possibly the 1970s saw something akin to this but that was for different reasons, I believe, and none having to do with either faith in the currency or the “petrodollar effect”.]
Bear in mind too I am not including inflation as a factor since the euro is also a fiat currency. Recently the euro’s inflation rate has been very high, almost 3%, and while it seems like it would make sense that this fact undercuts its value, and indeed it may well do so for consumers in Europe, it boosts its value v. the USD for a lot of weird and esoteric reasons. But the net result is the same for the average American consumer: If you were in Europe sitting there with a bunch of AmEx traveller’s checques, I’d suggest you exchange them for local money ASAP, as they are just sitting there in your passport case losing buying power.
But what does this have to do with the US? Well, we buy stuff from and via European nations. If their money is worth more but what folks there are getting paid (or businesses able to buy) is staying the same vis-a-vis the actual currency they have, their money is in essence worth more than ours, so they are charging more today than yesterday, even though the nominal prices stay the same, in order to make profit—or else not sell to us if we can’t meet the price. So if they cut their prices, they lose their margins, and of course, we hurt, since we already are stressed to afford whatever it is they are selling, and not getting the stuff we want. Strangely then, as recent history with the Chinese yuan has shown, it can often be to a country’s advantage in a sense for its currency to be less valuable that that of its trading partners. However for the individual citizens within the country? Well, things not so good from that point of view.
OK, so now that I have ruined your day, keep reading, as I am finally getting to my “Magnum Opus”, posted on Sunday... read the next entry below...
posted by Matt Campbell at 3:37 PM
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