The printing presses at the Fed have been working overtime for a few years now and continue to do so each week as the Fed buys more mortgage securities. In my Economics 101 class in college, one of the first things we were taught is that when supply exceeds demand, the price should drop. Because so many other countries are having financial trouble, the demand for the U.S. dollar has remained fairly strong and the price has held up pretty well in relation to other currencies.
But what happens when these other countries get back on stable ground? Will the dollar be able to hold up then, when there are so many in circulation? Declining currencies help the exporters of goods and services, but it also takes away purchasing power from the holders of that currency. In our case, if you made 5% on your investments in a year and the value of the dollar dropped by 5% that year, you have a net zero gain in purchasing power. If inflation happened to be 4% that same year, you actually lost purchasing power because of the declining dollar.
Currencies fluctuate up and down a lot on a short term basis and there isn’t a lot to do about that. Because of all the dollars that have been printed since 2008 and the likelihood of dollars continuing to be printed because our federal government cannot control their spending, then the likelihood of a long term decline in the value of the dollar becomes greater. That long term decline can have a very negative impact on purchasing power and could upset retirement plans.
One solution to protecting yourself against this, depending on your risk tolerance and objectives, is to have some of your money in investments that are in foreign currencies. These certainly carry risk, but so does having all your money in dollars.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2013 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
