Oct 02, 2007

When President Bush took office seven years ago, it cost just 87 cents (US) to buy one Euro. Now it takes about $1.42 to purchase one Euro. This is a currency meltdown of huge proportions.

The upside is that American exports are cheaper and can be more competitively priced, assuming we have something to export, of course. But with so many major US companies "outsourcing" everything, the positive effect of our exports has been seriously eroded.

The downside of the dollar's collapse in value is that whatever we import suddenly becomes more expensive, because it takes more dollars to buy it. Economists call this "inflation." Inflation of the price of goods and services actually means the deflation of the dollar's value.

The Fed's recent interest rate cut is being touted as the positive solution to America's economic woes. Certainly, it will be helpful to some in the short term. But the long-term effect of this rate cut is that foreigners who have bought our debt notes will not want to keep doing so. Foreign countries such as China, Japan, Saudi Arabia, and Switzerland hold dollars in their reserves, which are decreasing in value daily. Buying US debt at lower interest rates won't nearly cover the losses created by the currency devaluation itself.

China and Saudi Arabia are starting to show alarm over the situation and are threatening to start dumping dollars. If they were to dump dollars, it would signal to all other countries and speculators an imminent meteoric collapse of the dollar--and then everyone would rush to dump their dollars. It's like a big inverse run on the bank. Instead of people standing in line to withdraw their savings, they are using their savings to buy something else of value (such as another currency). When everyone sells their dollars, the dollar's value is trashed, and this results in "runaway inflation," at least for imported goods.

When President Bush took office, it took only $273 to buy an ounce of gold. Now it takes $740 to buy the same thing. It's not that the price of gold is going up, but rather that the value of the dollar is going down. It's all relative. Whoever is holding dollars, such as in a savings account, is losing money, even if it appears that the actual dollar amount is increasing by 4 percent a year. If a person had put his money into gold when Bush took office, his money would now be worth far more. But gold is only one commodity. The same could be said about virtually all other metals on the world market. It takes more dollars to buy any of them today.

The price of oil was just $22 a barrel when President Bush took office. Now it has risen past $80 and rising. Why? Not because the Arabs are raising its price, but rather because it simply takes more dollars to buy the stuff. Predictions are that with the Fed's recent drop in interest rates, the dollar will collapse further, and oil could easily hit $125 per barrel by next Spring.

It doesn't take a degree in economics to understand a few basics. I am not an economist, but I do take heed to what they say. I know that government-sponsored economists are hired to calm the public and make them feel like the economy is strong and healthy, so that the people will continue to have faith in the dollar god in whom they trust. Truth is somewhere down on the list of priorities and is set forth only when it serves their "higher" purpose. They are paid to lie or manipulate the facts in order to prevent a "panic."

Perhaps that is somewhat understandable. But those who can see through the lies will able to take steps to lower their risk of disaster in case a panic actually occurs. What should a person do? I am not an economist, nor is this my calling. I cannot give you any advice, other than to advise you to educate yourself as best you can, and take steps accordingly.

One thing seems certain: the dollar is going to continue to degrade in value for the foreseeable future, unless the Fed RAISES interest rates. If they decide to raise the rates before the next election, then holding credit or mortgage debt will be the problem. That problem, however, is unlikely, due to political realities.