I have avoided this subject since it is extremely comprehensive and difficult to comprehend. But out of popular request, by you my readers, I have decided to tackle the subject of US currency valuations, its impacts, and related investor fear in this article.
The U.S. dollar is the preferred world reserve currency and the most powerful instrument both domestic and international. This article explores how you, the real estate investor, are impacted from its valuation and what we should be doing as a nation to best manage it.
Fear is certainly not unwarranted given that a swing in dollar valuation against foreign currencies impacts the price of almost all U.S. goods. In particular, investors of U.S. Real Estate and U.S. Equities watch our currency very closely to monitor the future health of our economy. When the dollar is highly valued compared to other currencies the US consumer reaps lower domestic prices for all imported consumer goods and materials (everything from toys to building materials). Of course a highly valued U.S. dollar makes all of our exported goods more expensive to international consumers.
In contrast a weak US dollar makes imported consumer goods more expensive and exported goods less expensive to the rest of the world. Large swings create havoc to our economy and make monetary policy difficult at best. Ultimately, ourselves and the international community strive for a predictable and stable U.S. currency. This allows us to regulate our monetary policy more effectively and stabilizes the prices of goods and services. From time to time we have seen our international suppliers/buyers manipulate our currency in hopes of getting more out of the U.S. consumer, however given our recent economic woes, most of the international community is trying to create dollar stability.
Unfortunately in recent months our currency has not been stable. We have seen a considerable devaluation. The international community sees us as spending more than we have and topping all records for U.S. debt, thus making us a weaker economic force (high debtor). In the past two weeks there has been a steady move towards gold futures, believed to be a safer form of capital, by many investors. We have seen some of the international countries start to store money in a basket of currencies or the more favored commodities (i.e. gold, silver, etc.). But thankfully, the U.S. currency is still the dominate currency by most.
Many doomsday people believe our currency is about to fall off a cliff. Such an action would surely lead to U.S. chaos and perhaps a great depression. I do not believe that such a situation will ever occur. In my opinion we are too intertwined with international economies. They have everything to lose and little to gain by making the U.S. dollar worthless. In fact in recent days, the continuing fall in the U.S. dollar prompted a number of Asian central banks to intervene in foreign-exchange markets by buying the U.S. dollar and selling their own currencies. These were said to include South Korea, Hong Kong, Taiwan, Thailand, the Philippines and possibly Indonesia. A move to make certain that their exports to the United States will still be affordable to the mass buying group of U.S. consumers. This is why I believe the U.S. dollar will remain intact for many years to come. It is not in the best interest of foreign entities to see the dollar fall too low.
Yes, there has been talk of other nations attempting to remove the U.S. dollar from its status as the world's reserve currency. I am sure that we will continue to hear more of this in years to come. Such a notion is very unpopular to many Americans since it would demonstrate a loss of international confidence in U.S. economics and make us less influential to the world markets. As international markets grow it is likely that the U.S. currency will eventually fall out of favor. This is unfortunate but many economists predict it as inevitable. Our leaders will continue to try and maintain our currency status for as long as possible. No one economist can predict when our currency may fall out of favor as the world reserve currency but my guess is that it is many years off. For now, I urge our political leaders to let the U.S. capitalistic engine recover from this recession and rely on our American ingenuity and talent to bring us back into the 21st century as a reliable source and a stable currency, once again.
In the meantime, real estate investors should watch the U.S. dollar to see if it continues to slide. If so, you can count on mounting pressure from the federal reserve to increase interest rates. The fall of the dollar is primarily related to over spending by our government. In turn many believe that excess spending will lead to inflation. Inflation is tamed by increasing interest rates. I for one, believe inflation woes are at least 15 to 24 months away, however it is certain to become a focal topic when buying investment real estate in years to come.
Another factor to consider is that the U.S. needs to borrow money from the international community to afford the recent government expansion and stimulus. This money has a price, usually paid in the form of Treasury Bills, at a prevailing market interest rate. For now the rate is very reasonable and affordable. Unfortunately the more debt we accumulate the more the U.S. will be considered a credit risk and likely higher interest rates will be necessary to attract buyers of our debt. Once again this in turn creates higher interest rates in our banking industry and therefore costs to consumer credit and housing interest goes up.
The U.S. dollar has dropped 12 per cent from the peak it reached this year in March, and analysts don't expect any pickup until there is a sign the U.S. Federal Reserve might begin hiking its key policy rate. I urge our policy makers to reduce or hold back on more stimulus money and allow our economy to recover through good old fashion capitalism. This in turn will allow us to take a breath and perhaps buy us more time as the favored world reserve currency.
As for Real Estate Investors, the present and the near future are the best time to lock in your purchases with extremely low interest rates. This might be the last time, in our lifetime, that they will ever be this low.