A Drowning Dollar

November 2nd 2007 – The American dollar keeps plummeting versus other inter- national currencies. After the invasions of Afghanistan and Iraq, the sub-prime mortgage crisis and Armenian genocide row making the price of the oil barrel skyrocket, currencies such as the European Euro, the British Pound and the Canadian dollar have achieved all-time highs against Uncle Sam’s buck and show no sign of stopping.

To give the example of the Canadian dollar, in January of 2002, it was trading against 61.79 cents US. This brought about a plethora of derogative jokes against the ``monopoly money`` that the Canadians used. American media are not so smug anymore; this morning, the Canadian dollar was worth 1.07$ American, an all-time high that denotes a 45 cents rise in the exchange rate in just a few years. Unfortunately, this rise in the value of the Canadian dollar has not been reflected in the prices of gas or consumer goods. This has created a massive consumer exodus to frontier American cities such as Buffalo or Detroit where Canadians are just going wild. A situation that is similar yet properly European is occurring with the Euro.

From a modest starting point of 1 Euro for 1.0015 dollars American in 1999, it proceeded towards a downward plunge to 82.52 American cents for 1 Euro in October of 2000. Following the disastrous economic events of the Bush administration enumerated above, it has climbed to an unbelievable 1.44 American Dollars to buy a single Euro on this Friday before the Celtic New Year. The similarities with Canada include the reticence of big consumer goods to drop their prices. Car companies such as Volkswagen have even pulled back their American ties of production to justify their constant prices. Europe is different in that the small consumer can’t pop over a border to buy American products for a lot less. Their neighbours without the Euro such as the U.K. or Russia have either a higher exchange rate, therefore no advantage or a constantly very low currency, with very high import/export taxes. This just leaves the Great British Pound.

The Pound Sterling has long had one of the highest exchange rates in the world. Nevertheless, the American Dollar has long kept its status of world template because of the overwhelming American share of world production. Once again, primarily for the reasons in my introduction, The Pound has exploded from 1.60 American dollars for 1 Pound to a rate of 2.08 USD for a British Pound. Almost a 50¢ rise in 3 years! This all smells of a recession and possible depression for the American Economy…why does that sound familiar.

Depreciation of world currencies is not a new thing. As an example, I will use the German Deutsch Mark following the unstable 1920s and 1929 crash. After their loss of the First World War and their consequent ``signature`` of the Treaty of Versailles Germany was obliged to make drastic reparation payments to the rest of Europe and to America (132 billion Gold Marks). Furthermore, an unstable republican government (Weimar) forced the country to not only borrow massively from the Americans to pay back a war debt…to the Americans but they were also forced to print ridiculous sums of money that were unjustified. This created a perfect contexte for hyperinflation. In 1922 for example, prices were doubling every 29 hours. When the crash finally hit Wall Street in 1929, the Americans called back all their loans to Germany instantly. Close to a hundred German banks declared bankruptcy and the already worthless Deutsch Mark became less valuable than the paper it was printed on. Try to imagine you are a German entrepreneur that has been saving up 5 DM of his 12 DM weekly pay since 1900. Now, imagine living in 1923, when the Mark reached an all-time low versus the American dollar. 1 USD was trading for 4,200,000,000,000 marks. That’s right, 1 USD for 4.2 TRILLION DM. Your life savings of, perhaps, 5,200 marks (5 DM X 52 weeks X 20 years) are now worth an infinitesimal fraction of an American penny. No wonder suicide then became the national sport. Could the US get all depressed again?

I am not saying that the United-States is heading for hyperinflation of German proportions; it will probably bounce back with a Democrat government. The underlying story here is that it has become obvious that globalisation has brought about a corporate economy that no longer follows world economic rules. I am still paying 15 dollars more in Canada for an American book. Someone must be laughing hysterically as they roll around in piles of Canadian ``monopoly money``.

(Pictured: A 1000 Deutsch Mark Bank note stamped to read 1 million DM - a good old 100$ Bill)

End.