Happier Abroad Forum Community

Holy cow, when I returned here to the Philippines, I found that the dollar has now dropped to 42.9 pesos! It was at 45 or 46 when I left. This is a big hit on all American expats in the Philippines.

I was wondering:

1) What causes the dollar to fall exactly? What are the primary factors? And who determines the value exactly?

2) Can it ever hope to go back up?

3) If I choose another currency, is it better to put my money in Euros or Pounds?

Oh wow ... you are finally starting to observe a real problem and true root to some of the problems in America. Although, you only scratch the surface as a child at the Arcade who is only upset because the cool machine no longer takes his tokens.

The dollar is crashing, Winston, because America is not the rich country that you have been brain washed to believe. Yes, it has a very high GDP, but it's not evenly distributed, so the standard of living for regular citizens is very low and has been for almost 8 years. The economy has taken a serious dump since the Bush administration ... I won't say whether or not I think the Bush administration caused it, but simply address that this is the reality; cause unknown. Inflation is out of control, and out dollar is worth almost nothing. What has caused this? For the most part it relates to the out of control spending on the war, the decline in our exports, cheap foreign unskilled labor, dependence on foreign goods and the rise of the Euro. American buying power is very low at the moment, because we have become so dependent on everything foreign, so I guess it's no surprise that we have a huge exodus of expats who depend on foreign homes.

Right now, in Northern California, the average lawyer or physician (who didn't already own a home before the economy took a dump), is living like a substitute teacher, a full-time tenured teacher is living like a gas station clerk, and the gas station clerk is actually camping near the pumps, and on the shelter waiting list. This is despite rapidly falling house prices (which are still out of control inflated in some places despite the drop). You wouldn't even believe how many people have foreclosed this year (the reason for the falling real estate prices). It's pathetic. I just can't even imagine how things are going to be with a worthless dollar, fuel at 96 dollars a barrel, a bunch of bankrupt people running around with bad credit, and millions of undocumented people who still consider this an upgrade! Yikes ...

Anyway, f you can earn your income in a different currency, or invest in gold, or something, it may be in your best interest as an Expat.

Is there a chance that the dollar will rise again? Not if the most intellectual circles in our country and our allies continue to believe that the biggest problem in this country is our lack of openness to other cultures, geography lessons and a need to learn Spanish, Hmong or Mandarin. Actually, undocumented foreigners and other cheap foreign/refugee laborers have actually contributed to our recent lower living standard. Maybe ten years ago, when things were better, we should have focused on raising the bar for our education and knowledge of culture/language, but at the moment we have bigger problems than that. In fact, right now, the whole "we are the world" mentality is almost the opposite of what we need, as we have a serious lack of national pride and sovereignty. Keep in mind, similar conditions were present before the Nazi movement came to be. Similar artistic and intellectual movements as this took place in Germany (think of the Avant Garde, Nihilism, or 19th Century exoticism).

The dollar has been falling for years now, but didn't catch the public's attention until very recently.

In 2002 the exchange rate was 1 USD : 1.16 Euros
In 2007 the exchange rate is now 1 USD : 0.68 Euros

If you want to convert some of your USD deposits to Euros or AUD, you can do it easily at many over sea banks. My mother in Taiwan has had Euros currency account for many years. If you're in the US, you can use Everbank (note: they require perm. US address).

While everyone point fingers at the Federal Reserve, I think the reasons behind the dollars' fall is far more complex. There are many articles on the web and you can read them to draw your own conclusions.

From a simplistic view:

* When the Federal Reserve raise interest rate, it makes it more expensive to borrow money, but your savings will pay more in interest. The public is encouraged to save and not spend $.

* When the Federal Reserve lowers interest rate, it makes it cheaper to borrow money, but your savings will pay less in interest. The public is also encouraged to spend more $.

Because the Federal Reserve lowered the interest rate recently, they made it cheaper to borrow US dollars, and therefore de-valued the dollar versus other currencies not pegged to the dollar. This will encourage people to borrow and spend more, and also provide some relief to people refinancing their mortgages. The down-side is that if you're saving money in cash, your dollars will be worth less and the savings/CD interest rate will be lower.

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Now, let's examine the recent run-up on real estate prices from 1998-2005. Here in Orange County a condo that was priced $130k in 1998 went to a whopping $450k value in 2005, before going down to <400k in 2006. This was our RE bubble.

In 1999, I recall my first mortgage was something like 8.25% interest. If you were borrowing $200k @ 8.25% for 30 year fixed rate loan, your monthly payment would be about $1500.

Then in the mid of the RE bubble the interest rate fell to as low as 5.5%. The same 200k loan would have a monthly payment of only $1,135.58.

Since it's cheaper to borrow money, people could afford to bid up on home prices, and consequently the real estate market bubbled. If you could only afford a $1500 mortgage payment in 1998, you could only borrow $200k. But at 5.5% interest in 2004, you could afford to borrow $270,000.

Then the sub-prime and exotic loan lenders came in and offered all kinds of ARM/adjustable loans with teaser rates. Remember the ads claiming that you could borrow $300k for a low, low monthly payment of only $xxx? Well if you read the fine print, it says the rate is only good for a limited time, then it resets.

But people didn't care. Home prices were rising and everyone thought they'd buy a home for 300k and sell for 500k. It didn't matter to them that they couldn't afford the mortgage later down the road. The lenders also became stupid and allowed "no documentation" or "lier loans". Can't afford the home on your income? No problem, put down you make $300k/year and nobody will check (duh?). The real estate market finally peaked in 2005 at ridiculous prices, and it's been falling since.

The US Government doesn't want to see all the people who bought homes at inflated prices going bankrupt, so our Federal Reserve is lowering the interest rate to make it cheaper to borrow money. That way the people who bought homes on ARM loans can afford the refinance and keep their homes. In some states like CA, your original home loan is no-recourse, should you decide to mail in the keys and walk away. The banks have an incentive to keep you in the home, instead of being handed a depreciating asset that's worth less than the loan.

The base value of a property is calculated by its potential income. That is, if the house can be rented for $1,500/month at market rate, then its base value is equal to the loan needed to purchase the property at monthly payment of $1,500/month. If it cost you $1,000/month to buy the house and you can rent it for $1,500/month, then the property is under-valued. But if it costs $3,000/month in payments to buy it, then the property is grossly over-valued.

So one might ask, why would anyone buy an over-valued house? If everyone was jumping off a cliff, would you do the same? The answer for many people, sadly, is "yes" like these guys:
http://www.nytimes.com/2007/11/16/scien ... ref=slogin

When all your friends and neighbors are getting huge appreciations on their property, and they refi to take out $ to buy shiny BMW's, it's a lot of peer pressure. Some people can't handle it intelligently and leap off the cliff too. The smarter ones, buy and flip for large profits, and exit the market quickly at start of a downturn. For example:
http://www.redfin.com/stingray/do/print ... id=1150985

Check the purchase history. The previous owner bought and sold it in 5 months in 2004, flipped it for $99,500 profit. The current owner bought it for $400k and hoped to make some $$, but will lose at least $100k because he held it too long.