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Could you please explain the long-term decline of the dollar and predict the long-term implications of this trend?

Name: James Welch
City & State: Philadelphia, Pa.

Question/Comment: Please explain the long-term decline of the dollar and predict the long-term implications of this trend. As an aside, you are a great reporter. You present complicated economic issues in an intelligent and understandable manner. I always perk up for your reports.

Paul Solman: We buy more from other countries than they buy from us. To buy abroad, we ultimately need to trade our dollars for the currencies of the countries we buy from. Let's call them globos. To buy from us, other countries need to trade their globos for dollars. But since they need fewer dollars than we need globos, there is an ever-greater supply of dollars out there; an ever-greater demand for globos. If you think about it for a moment that means that the price of dollars, in terms of globos, is bound to go down.

And so it has.

The implications? Stuff that's denominated in globos - or euros, yen, or even rubles or rupees - will become more expensive for those holding dollars. So get in that trip to Venice or Jaipur as soon as you can. Or figure out a way to hold some of your assets in foreign-denominated currencies.

Bottom line: Your life as an American is going to become more expensive - to the extent you buy goods and services from elsewhere.

Meanwhile, to the extent you sell abroad, you should be ahead of the game. That's why American manufacturers have been particularly vehement on the subject to the dollar/Chinese yuan exchange rate. We think it's being manipulated by the Chinese to keep their currency artificially low, so Chinese exports won't rise in price and become too expensive.

-- Posted December 20, 2007 | Comments ( ) | Permalink