It’s time to get ready. You should always be prepared. Don’t say that you had no warning, because the alarm bells are sounding, sirens are wailing and emergency lights are flashing.
No, there is not a fire. The police are not looking for you, don’t worry about that. Well, maybe they are, I don’t know… but that is not what I’m talking about.
What I am talking about today is that all of us expats, particularly American expats need to be prepared for a fall in the value of the US Dollar. The signs are evident and have been for some time.
I believe that at this time, you need to adjust your budget and prepare yourself for a P40:$1 exchange rate. It may or may not come this year, but I believe it is on the horizon. We saw P40:$1 a few years ago, but in a short time the Dollar got back to a P45:$1 exchange and even up to P48 or so. Lately, we have seen the Dollar hovering in the P44 to P46 level. The trend in the past year or year and a half, though, is a lower value for the US Dollar.
Why? Well, the reason is pretty simple. The US Economy is in the dumpster. And, the way the the US Government is trying to deal with it is by spending money at an unprecedented level. Keynesian economics has long taught that the way out of a recession is for a government to spend on infrastructure and other such projects to put people to work. But, the United States is spending way more than ever, and many of the things that the money is being spent on is basically just like throwing the money out the window. How many new roads or bridges are you seeing under construction? New schools? Dams? It just doesn’t seem so.
Right now, a huge amount of American debt is being held by China. Other countries too, but China is number 1. If the Chinese decide to abandon future investments in the US economy, the USA will be in deep trouble. If you were the one financing the US debt, would you continue to provide more and more cash to keep the country above water? Me either.
If you think about it, the US Government strategy may actually be for the dollar to go lower in value. It actually helps the US Government if the dollar is worth less! Yes, it’s true, if you think about it. Think of it like this, if you owed somebody $100, even if the Dollar went down to half of it’s value, you still only owe $100. Since the dollar went down half, when you pay back, you are actually paying back less than you borrowed, in real value terms. So, the lower that the Dollar goes, the less that the US actually owes! So, part of the US strategy of paying back all of this debt might be for the dollar to actually decline in value!
Another method of dealing with the huge debt that is piling up is actually even scarier. What if the US Government went bankrupt? It could happen, and in fact it may be a lot closer to that doomsday situation than you even think it is. There has been talk in economic circles that such a scenario could actually happen in 2010, or soon after. If the US Government were to declare itself bankrupt, the value of the US Dollar would plummet overnight. We would not be looking at a P40:$1 exchange if that happened, we might be looking at a much lower exchange rate of P25:$1 or so, perhaps even less.
Just yesterday, Moody’s, a highly respected institution that issues credit ratings for governments worldwide issued a statement saying that the USA’s sovereign AAA credit rating is in danger of deteriorating. They went on to say that unless US economic growth becomes more robust, that the USA “faced a trajectory of debt growth that was continuously upward.” This information does not bode well for expats, or anybody who is counting on the stability of the dollar.
Do you think that the Dollar could drop from P45:$1 to P25:$1 in a relatively short time? It seems impossible, right? Well, there is a common saying that:
Those who don’t study history are bound to repeat it.
Let’s look back just 13 years to 1997. The Philippine Peso was trading in the range of P25:$1. Then the Asian Financial Crisis hit. Almost all Asian currencies fell like a rock almost overnight. In only a short time, the Peso went from P25:$1 to P40:$1, and over time it lost a lot more value, all the way to P56:$1. Could it happen to the dollar? Well, a lot of you are saying it is impossible. After all, the Philippines is a “banana republic” after all. Well, look at the USA is handling it’s money, is the US any better than a “banana republic” now? I’m sorry, but looking in from the outside, it seems that there is not much difference. Remember also that in the past 2 years or so of severe economic downturn, the US economy is probably the hardest hit economy in the world. In the same time, the Philippine economy has continued to grow. The Philippines has not entered recession at all during this time of worldwide economic calamity.
So, with all of these factors, I believe that as expats, we should be planning and preparing for a drop in the Dollar. It’s almost inevitable now. I hope it doesn’t happen, but I don’t see much chance of avoiding it. Perhaps the dollar will rebound as it did a few years ago. I think, though, that it is just as likely that we are in for a long term decline in the US Dollar. If it doesn’t happen, it will not hurt you if you prepared for it. If it does happen, you could be hurt very badly if you are not ready.
I think it’s time to look at options, study possible changes in the way we do things, and generally we should be quite conservative with our personal finances at this time. There really is no downside to doing it.