Lower Interest Rate Slashes Value of US Dollar Denominated Assets

“It seems so obvious.”

My wife Elizabeth was looking at the headlines from Thursday and Friday’s International Herald Tribune.

Thursday came the announcement: “Fed cuts key rate by half a point…”

Friday’s news brought the follow-up: “Dollar pays price for Fed’s rate cut”

“It says the Fed is trying to save the economy from the housing problem…but I wonder how much of this rescue we can afford.”

An economic explorer…arriving, like Columbus, on the shores of our New World Financial Order…would be amazed, puzzled, impressed…and completely lost. He would see before him the most astonishing things…things he never before imagined or thought possible.
A whole civilization – the most advanced economic civilization of all time – resting on an almost miraculous money system. Everyone, everywhere uses the US dollar as a reference, and a substitute, for wealth. It is taken by plumbers as well as by military contractors, drug merchants and oil drillers. It fills the coffers of Asian central banks and the mattresses of Ukrainian grandmothers. But what are these dollars really worth? And if you don’t know what they are worth…how do you know what anything else is worth?

Our economic Magellan is mystified. He is accustomed to looking at the stars. The stars may move about in the heavens, but their movements are known, reliable, and always the same. He only has to crane his neck and refer to his charts; thus does he get his bearings and plot his course. But what course can a modern investor plot out, when all he has to guide him is a piece of shifty paper?

The paper dollar was caught by a gust of wind yesterday…it blew down to its lowest level ever. Measured against the euro it hit a new record low – worth less than US$1.40. Measured against crude oil , it hit another new record low – worth only 1/83rd of a barrel. As for commodities generally, the dollar also registered a new record low – at 441 on the CRB index.

Gold, too, hit a new record high against the dollar – at US$739.

It was not a new record…but still worth mentioning: the dollar fell to a 31-year low against its closest neighbour, the Canadian dollar or “loonie”.

This morning, we went to a neighborhood café…we had a croissant and a cup of coffee. Shortly after the euro was introduced, this breakfast would have cost us about US$4. Today, it was US$7. The euro traded as low as 88 cents to the dollar during the last years of the Clinton administration. Now, it is worth nearly twice as much (a few years ago, we guessed that the dollar would slip to US$1.50/euro. We are now not far away).

Cutting the fed funds rate, Ben Bernanke , former head of the economics department at Princeton and now head of the US central bank, hopes to avoid a recession. Central bankers do not like recessions because politicians do not like recessions. Politicians do not like recessions because voters do not like recessions. But why don’t voters like recessions? Because recessions – which, by definition, are declines in national output – make people feel poorer.

But wait, says the Sebastian Cabot of the economic trade, isn’t everything Americans own measured in dollars? And if the dollar goes down, doesn’t that mean that all their assets and their earnings are going down in value? And if their assets and earnings go down in value…aren’t they, well, poorer?

“The world dumped the dollar Thursday,” begins the IHT account. “The day left little doubt that attitudes toward the dollar were evolving faster than most analysts had expected.”

Yes, dear reader, the dollar seemed to go into freefall yesterday. Ben Bernanke did nothing to slow it down; it was he who had kicked it out of the aeroplane! And with the falling dollar went down Americans’ real wealth. Today, they can buy fewer things with their money; they are poorer. Just how poor are they? From the time the dollar traded for 88 cents against the euro until today, an American has lost nearly 60% of his purchasing power in Europe. In the gold market, he has lost even more; his dollars from ’99 will buy only one-third as much of the metal. Even his house didn’t keep up – it is only up about 100%. At the gas station…his purchasing power is similarly reduced. And now, the foreigners are buying up his assets at cut-rate prices.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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