It’s a nosedive. Freefall. Hard times ahead, perhaps.
I’m talking about the US Dollar exchange rate for Philippine Pesos. I predicted in my predictions for 2010 that the US Dollar was going to experience some tough times in terms of exchange rate, and so far, I’m afraid that my prediction is proving to be correct. I wish it were not true.
We started off 2010 with the Dollar trading at P46.14 to the Peso. Over the past year the Dollar has traded as high as 48.7 to the Peso. Currently, the US Dollar is trading at the low end of the P44 range, around P44.2, depending on when you check it. So, this calendar year we have lost about 5% of the value of our money, and over the past year (since April 2009) we have lost about 10% of the value of the US Dollar. Figure that inflation here in the Philippines has been in the 7% range, and adding the decreased value of the Dollar, and American expats have lost nearly 20% of our buying power over the past year!
Expats from other countries are doing a bit better, although not great.
Here is what our British expat friends have been experiencing:
So, one year ago the Pound was in the 71 range against the Peso, during the course of the past 12 months, the Pound went as high as nearly 81, and currently the Pound has dropped back to 68 range. So, the Pound is down about P3 to the Pound since a year ago, but as much as P13 against it’s highest values in the past 12 months. So, things are not looking so good for the Brits either.
Here is what our European friends have been experiencing:
One year ago, the Euro was trading in the 62 range against the Peso. Over the course of the last 12 months, the Euro climbed as high as 71 against the Peso, but now it has fallen back to only around 60 to the Peso.
Our Australian friends seem to be doing the best, here is what their currency has looked like over the past 12 months:
As I said, this is the best looking currency graph out of the foreign currencies that I looked at and how they have been trading against the Peso. A year ago the Australian Dollar was trading at about 34 against the Peso. It later climbed as high as 44 and has now settled in the 41 range, so our Aussie friends have actually experienced an increase in the local value of their currency over the past 12 months. I wish we Americans could say the same thing! I suppose that this really makes sense, because the Australian economy was a lot more resilient through the economic downturn than the European, or particularly the American economy. The Philippines never did enter a recession over the downturn, so these numbers do tend to make sense.
Since the USA is not only continuing deficit spending, but actually the deficit in the States is ballooning, it can only be expected that the Dollar will continue to fall and make life even more difficult for American expats here. It is likely that the European currencies will continue following that trend as well, as the Eurozone is experiencing problems, particularly related to the financial situation in Greece. These factors will continue to pull down the US Dollar and the British Pound and Euro as well.
I wrote an article on Monday about the fact that a lot of expats that I know are moving back home after being unable to make it in the Philippines. One of the reasons that a number of these people have given to me for moving back is because of the instability of the Dollar, causing them to give up on living in the Philippines. In my opinion. the amount of fall of the dollar has been relatively small so far, and I can’t imagine somebody bugging out because of a 5% loss of value in their home currency, but if current financial trends continue, it would make sense to see a lot more expats being forced to leave the Philippines due to an inability to afford to continue living here.
So, how do you solve the problem and make yourself more financially secure, no matter what currency exchange rates come down the road? The answer is relatively simple. First, you need to learn how to live on a more tight budget. Secondly, and most importantly, we come back to a word that I talked about recently: Diversify. Let’s say you are an American expat, like I am. Your earnings from a pension, Social Security, or your savings are in US Dollars. It’s time that you start looking at how to start bringing in a few Philippine Pesos too. Can you open some kind of business that will allow you to earn from the local economy? It can be done, and it is something that I am currently studying, looking into and working on. I expect that by the end of 2010, I will have a Philippine based brick and mortar business that earns Pesos to compliment my other Dollar earning businesses. Having that will insulate me from Dollar variance in the exchange rate.
How about you, do you have a plan for how you will protect yourself from currency fluctuations? It’s something to think about, think about it now before it is too late.
Yesterday there was a report on BBC World about the Philippine economy. Growth was 3,5%, the worst performance compared with it’s neighbors and the growth was almost entirely because of consumer spending thanks to the money from the OFW’s. They predicted hard times to come. Necessary reforms were needed but not expected until after the elections.
Hi Luc – Well… the elections are only 2 weeks away, so if changes don’t happen until after the election, well, that won’t be long! 😆
Hmmm how long it takes to count the votes, quarrel about the results, recount, inaugurate the new president, form a new government 🙂
Hi Luc – The vote counting, with the new electronic system, is supposed to be done in 2 days. We’ll see! 😯
For those with savings might want to think about opening an account with HSBC and you can keep your money in 8 different currencies including Canadian, Australian, New Zealand which have all done well against the USA dollar. HSBC has branches in the major cities in the Philippines. You can also have accounts in four other HSBC branches in other countries around the world as well. You get debit and ATM cards and checks of course.
Hi richard – I think diversifying into different currencies is a good idea. Putting it all into a single banking entity may or may not be good, but HSBC is probably one of the stronger ones out there.
Bob,
Both the Aud & Can dollar comparisons – to the PHP – look great, when compared over the previous 12 months, however, this is due to the fact that May 09 was the end of the perceived “global collapse” experience for these same countries. Though I have heard much anecdotal evidence of Australia experiencing a present economic boom in some areas, I would suggest that Canada’s perceived recovery is premature. In the long run, I believe that all of the countries/regions mentioned in your article are in serious trouble, as “we” cannot compete with Asia when it comes to services and manufactured goods, without a significant adjustment in associated costs. Perhaps, one living in the Philippines should consider strategic industrial properties acquisition – through spouse – and investments in Asian/Middle East markets. It is noteworthy that many investment advisors in North America are pushing more Asian markets investments, these days. One must also wonder if the “corporate world” in North America & Europe have learned anything from the recent past.
Mike2
Hi Mike – I think that the Australians went through the crisis pretty well, and I think that as of now their future is bright. Only time will tell.
Bob
This topic it of great interest to me, I have been reading your site for maybe 2 or more years now and have commented only a few times. First a bit of history: I am 43 yrs old and have been to northern mindanao several times over the years starting in 2003. I have been buying farm land in the bukidnon area for about 2 years now. we have a small piggery(10 to 40 pigs at a time, some corn crops and a small store. I am hoping to grow each and everyone of these projects bit by bit over the years. You may be asking by now, so what, what does this have to do with the rise and fall of the dollar compared to the peso. Well, I hope to retire in the Philippines within the next 5 to 10 years. I am building the infrastructure for business now and also learning about doing business in the philippines while I can still afford to not be so successful. You see, when I retire there, I want not to rely 100% on income from the U.S.(dollars). Or 50% for that matter. I(my businesses) will be earning pesos when I live there.
Lost my train of thought, wife looked over my shoulder and started reading, screwed me all up.
Anyway, I think moving there you need a diversified portfolio of income to realistically survive economically.
Robert
Hi Robert – I understand what you are doing fully, and I think you are making a wise move. Become self sufficient. Earn Pesos since you plan on living here. You are making some good moves there, Robert. Congrats.
Deficit is going to hang heavy on the dollar…. adding a trillion in health care down the road is not going to help…it needed to be addressed but this was NOT the time to do so..there were bigger fish to fry IMHO. This is going to be a long drawn out affair, this november will be a blood bath for incumbents and democrats…as much as i would like to see the aristrocrats sent packing I’m afraid freshman within a year will be to blame for the protracted downturn…Americans have short memories.Sadly the USA has all the signs of a dying empire. There is more going in Washington than most know about, to be very brief, the Federal Reserve cartel has alot to do with this mess.
I think you are correct that those who diverisfy, survive.
Hi brian – Nice to hear from you, my friend. Yep, diversification is a good first step. I see no downside to diversifying your assets, or anything else in your life. There is huge potential upside. I’m afraid I agree with you on the “dying empire” statement. It’s sad.
Hi Bob,
Many LIP posts have touched on how one might make a hedge against currency fluctuations. Every person’s situation is different of course, so what might work for some might not be right for others.
Doing some soul-searching and research on where you’d be comfortable living and on what kind of budget you’d be comfortable living with would be important, and as you said Bob, sticking to it the best that you would also be necessary. If you choose to live near family, you have to factor in how you’d handle that financially too. Possibly choosing to live in a provincial area, could help eliminate some expenses that living in or near a city might bring.
If possible owning your own home and vehicle if you could, would help combat rising rental costs and the chunk it takes out of your monthly budget, and down-the-line expenses. Learning to love local foods, and trying to not rely completely on eating the foods that you’re used to craving and eating abroad could save money. If you live in a provincial area, you could save money by growing your own, or hiring people to grow your fruits and vegetables, livestock, etc. and that could be a buffer and savings.
Bob, your idea of having a local peso earning business appeals to us too, not only to help ourselves, but to provide work and a small income for extended family and friends. We’re hoping to organize some communty gardens on our own land and possibly town land to help friends and neighbors work to to grow and share food.
Here’s some possible “pipedream” businesses I’ve pondered, but have yet to act upon of course! lol (of couse a lot of the “grunt work” would have to come from others)lol
Maybe a neighborhood cottage industry in soap making as Feyma mentioned in a past post.
An orchid farm
Mushroom farm
A Landscaping business or providing maybe plants and trees to resorts
And my real favorite, a small lemoncito or a sampaguita farm, like in San Pedro, Laguna
Remember this wouldn’t work for everyone, and I’d be relying on my husband and others to do most of the work because I tend to be a little on the lazy, dreamy side…lol
Hi queeniebee – You and I could never be married. I am also on the lazy side! 😆 If you and I were married, nothing would ever get done! 😯
I think you have some nice ideas for businesses there, and I really like your idea about the community garden. What a great way to build some nice relationships with the community!
Good luck on chasing your dreams, queenie! I feel sure that you will hit on something very successful!
It’s true Bob! We’ll just have to rely on good old fashioned Filipino hard work, and the help of our own spouses to get some of these ideas off the ground. lol
Oh, and thanks for the kind wishes–maybe some of these dreams will come true…
Hi Bob, I think this is just the tip of the ice burg. The U.S. is going down the tubes, i see it all over the U.S. Bad news everywhere. I talk to alot of my friends that have the ability to exit the U.S. & they all have exit plans. All to other countries. That is why i am relocating to the Philippines. The U.S. i believe is going to fail it is not a question of failing but when. How can a country survive on a economy based 70 % on consumers. That’s like spending with a credit card & never paying it back. It makes me sad to think that this country that i grew up in is so scary that i am moving to another country to escape the down fall of a once great country. Yes i think starting a business in the Philippines is the wisest way to hedge against the down fall of the U.S. Asia was once the king of the world & will be again. That is just what i think. It is sad to me that in a very short time period 1-2 generations this great country, the U.S. is slidding into abyss. This is my opinion & i know it is a very depressing one. But this is why the Peso keeps getting stronger against the U.S. dollar.
Hi Scott – I am with you, I think that the US, economically has massive problems ahead. I hope I am wrong, it certainly would hurt me too, but I see a lot of writing on the wall.
Bob:
Minor hedging is always a good thing… Major hedging can get you into trouble very quickly, as can knee-jerk reactions. I still think that the exchange rate is a blip… They always go in cycles, sometimes reaching a plateau. Two years ago, in Australia, they were hurting with the rise in the AUS$ vs. the US$… Really pummeled the export market.
The reason that I am not so pessimistic about the dollar is that most of the world has a vested interest in keeping the dollar from collapsing. Gold, Oil, and most of the major commodities and financial markets trade in dollars. China, much of the Middle East, and many other regions are heavily invested in the US economy.
The Euro has not proven itself as an alternative, and the Pound has its’own issues due to the UK economy.
China is heavily speculated… I don’t think that the RMB would prove to a replacement.
Japan has its’ own problems.
The currencies you mentioned, AUS$, Canada$, and add in Korean Won and HK$, are too insignificant to matter.
The best you could hope to do is ride out the troughs and don’t get cocky on the crests.
*** As a side note, one of the advantages of living in the RP and getting income from overseas is that it is non-taxable here. You earn in the RP, then you pay RP tax.
Hi John – I personally feel that the US is in for some really tough times. There is a lot of writing on the wall, and I think it is nearly unavoidable at this point. You are certainly right about the currencies that you mentioned, but I just don’t see a good alternative right now. For somebody who lives in the Philippines, like you and I, I feel that a balancing act between the $ and the Peso is probably a wise move, though.
Hi John, Do you live in the U.S.? You should come back if you don’t & see the problems that are facing it’s people. A dollar that is tied to nothing but a promise. It used to be tied to gold. But you know that, i assume. The U.S. has major problems we are facing like high unemployment& massive debt, people that are working 2 jobs for the same money they earned before. A people that have lived well beyond there means for many years, with no saving at all. I guess if you have your cookies already what does it matter. I hope you are right & the U.S. green back keeps plugging along. But I beg to differ, there are to many signs on the wall to say other wise. Scott
Scott: I’ve been back to the States about 4 times in the last year in several different parts of the country. Yes, things are economically worse than they have been in many years, but the rest of the industrialized world is having serious problems also:
Japan: Third largest economy in the world… Very serious economic problems: The worst since WWII.
China: Second largest economy in the world. They are having a tremendous, unsustainable real estate bubble. Exports are down, with much domestic discontent brewing that is barely reported.
EU: The UK, Spain, Italy, Greece, and Portugal are completely upside down in dent. Germany is way down, as is Holland and Belgium. The only bright spots in Europe are France, which has weathered the downturn relatively well, and Poland, Estonia, Lithuania, Latvia. A cooleague of mine in Denmark stated that the public sector jobs there exceed 30%. Add in the lack of price competitiveness of Scandinavia / Germany, reduction in tourism, and a strong Euro, and things look bleak.
Middle East: Dubai is in default, and most of the region is still trying to overcome their own real estate bubbles. Revenues from oil are down, due to less demand.
The only regions to have weathered the economy relatively well are S. America, SE Asia, and Australia (For the moment).
I have visited all of these places in the last year. By far, the gloomiest mood was in Dubai, followed by the UK.
My point is that though things look bleak in the States, it is still, by far, the largest market in the world. All of the babble you hear about China is just babble… My friends there tell me differently.
Scott: Furthermore, the problems in the States come from other factors unrelated to the economy… The gold standard was dropped because it became unsustainable and the economic growth of the last 40 years would never have even happened had that standard been maintained.
Education standards. The US once was the leader in global engineering graduates. China and India each graduate enough engineers annually to fill a large-sized city.
The breakdown in family structure is another thing… Many comments on this board talk, sometimes in disparaging terms, about how Filipino families are full of money-grubbers. Yet, that large extended family serves a purpose when times get tough… Everyone relies on each other to get through.
The political focus on wars on drugs and terror, even though both “wars” are unwinnable. These ongoing expeditions contribute nothing to the general welfare other than defense and civil service jobs (including the military)… The amount spent pales compared to the benefits gained. This doesn’t even take into account the huge losses and waste from reduced productivity.
There are other reasons, but I think you get my point.
Hi Scott – Like you, I Hope that John is right… but I am not a believer yet.
John A very educated Man AND IS RIGHT ON…If the US ever collapsed the World collapses, Its still a great country and the Dollar will hold up…Don’t be a soothsayer,just be smart.
Hi lenny – We shall see…..
Recently, I have started an large investment into Philippine residential property and working a deal for some farm land. I am just hoping that the greenback stays afloat long enough to get my project(s) finished. Also exploring some other business opportunities in the Philippines. That is my brick and mortar diversification. As far as currencies are concerned, I also trade currencies and so far I am doing really well with that.
Kuya Bob, you speak of the buying power down turn over the recent years. Think back a little longer when the exchange rate was averaging 56:1…With inflation steadily rising and the currency at 44:1 that is a lot bigger loss.
Hi Mike – Yes, of course when the Peso was 56:1 we were in the fat cat seat… but I was just making a one year comparison. We have lost a huge amount of buying power in the 10 years since I’ve lived here.
It was only yesterday that my wife send 200 euro to Iligan city.
Only 57 Peso for 1 euro.
And yes it has been 69/70 .
And allso with cash , you get les P for your euro in iligan than in Manilla , even at the bank it,s 2P less ,
that i noticed in Febr , when we where in iligan .
But allso iligan is much cheaper to live in when you compare
price for food and house .
Yoe get a 60 channel cable plus fast internet for 999 P.
but you can not buy a LCD TV , even not in the new Gaisano .
But when i [we] come to retire ,
i will sure start a small buisenes for my wife .
Hi Anton – So the Euro has taken a bit more of a hit than I even wrote. It’s been a few days since I wrote the article, so it doesn’t surprise me, these things fluctuate. I hope that we can all see our currencies recover!
Hi Bob
The peso was even lower 2 to 3 years ago, I think getting to the 41 peso level. All the developed countries currencies are in trouble except for Australia and Canada (both being endowed with natural resources). That is why gold is so high right now. Right now the dollar is the worlds reserve currency and will likely stay so for several years to come, but in a decade or 2 that will most likely change. What would happen when commodities are no longer priced in dollars or foreign countries will no longer lend us money in dollars. I think Europe and Japan (their debt is about 180% of GDP) will have even bigger problems due to their rapidly aging population and generous benefits.
I think you will see even bigger problems down the road in the U.S. with huge budget deficits, pension liability, escalating health costs, though that is not to say the U.S. will ever be poor or that there won’t be huge pockets of prosperity.
One complaint I hear from some Americans in the U.S. who mention how people in the Philippines have to support their parents, is that really any different then us paying social security and medicare payroll taxes.
Hi Neil – Actually, the Peso was at a low just a hair above 40, but it appears we are headed back into that territory now. I hope we don’t go that low, but I think we will.
Neil, I think that your last paragraph summed up things very nicely!
Hi bob well yes our doller has gained somewhat but when i was there i think my american friends were getting 46+ to the doller whereas i could only raise 41 or so and at times 38 ,we now are getting about 43 or something but you yanks have had it good for a long time (hope that doesnt insult anyone not intended) you see the thing is that here in aus we know we are as good as you guys our currency is pretter than yours it comes in lots of different colours only joking interesting article bob i watch the exchange rate every day and we almost got ya earlier this year keep looking over your shoulder her come the aussies oi oi oi
chris
Ha ha… thanks for your comment, Chris.
For sure, the craziness in “developed” economies over the last 20+ years has caused massive issues that will have to be paid for. We seemed to forget, that in reality it is only production that creates wealth. That someone will pay $2m for a house that only cost $500k to build means that $1.5m is theoretical money, borrowed money. It doesn’t really exist, nor did it ever. All that is happening now, worldwide, is that we are going through a period of rationalisation and revaluation, and that is sure going to hurt all of us, because we are mostly, to a greater or lesser degree, owned by the banks who foolishly loaned that money (to people who were foolish enough to borrow it), and we all have to pay our share of the collapse. At the end of the day, if you own a cow, it’s still worth a cow, and that is really why the Philippines and other similar countries have not been affected in the same way as “the west”; i.e lower debt per capita. Indeed, as Bob has said the Philippine economy has actually grown, but I suspect there will be some problems to come there too, since the top end of the property market there has been inflating hugely in recent years. Borrowed money? I don’t know?
Now, like another poster on this topic, I have completely lost my thought process on this due to mad goings on with my two kids in the next room, so I am off to pour another beer!
Best advice I can offer? same as my Grandmother offered me: live within your means.
Beer…anyone?
Hi Jim – I think your grandmother said it best! Wise lady!
Hi Bob – Since I was able to detect your “Nosedive” article and associated graphs “in the queue” earlier this week, I’ve been saving an article I came across to insert into a comment.
Entitled, “Could Fixed Exchange Rates Be Coming Back?” by Ian Fletcher (an author and an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council), the article discusses returning to pre-currency manipulation days prior to 1971.
It’s a “think tank” piece, but contains valid food for thought.
http://www.americanthinker.com/2010/04/could_fixed_exchange_rates_be.html
Hi Paul – I will check out that article. I can’t imagine fixed exchange rates, but it might be an interesting read!
Hi Bob,
The US wants to devalue the dollar and convince China to increase the valuation of the Yuan. The new plan here is for the US to become a major world exporter of specialized services to the rest of the world while limiting imports and making it more attractive to limit spending and save more at home. Also, there is much talk about instituting a VAT but resistance to such unless the income tax is repealed.
Dave L.
Hi David – I’ve been reading about the VAT thing… it will sure be interesting to see Obama try to sell that one! 😯
I spent some time in the Philippines after Christmas and I was quite stunned at how expensive life had become since I last visited. My son who works for an American construction company in the Philippines, sends his children to private schools and the fee for each child top 13000 dollars a year; add in school trips, ect and you are talking about a lot of money. Property prices in Metro Manila are sky high and so are rents in decent apartment buildings. Life is not cheap in the Philippines and yet on the few occasions that I collected my grandchildren from their school, the place seemed to be mobbed with Filipinos driving expensive vehicles (plenty of Landcruisers). It would seem to me that the middle class is growing in the Philippines and will continue to grow rapidly.
With the above in mind it is difficult to see the Philippines as a viable place to retire going forward for Americans with only basic military or social security pensions. The dollar will not decrease rapidly in value but it does seem as if it is in a slow decline. Globalization means that the world is flattening and the standard of living in the west along with their currencies will decline and the opposite will take place in third world countries.
During the late seventies, eighties and nineties it seemed as if the entire British population had retired to Spain. Hundreds of thousands of people sold out in the UK and moved to Spain where they had cheap accommodation, cheap food and wine and plenty of sunshine. Unfortunately the currency rates did not remain static and when Spain adopted the Euro it was only a matter of time before trouble started. The British Government has now started a special taskforce to try and help British citizens who retired to Spain. Unfortunately they are now priced out of the property market in the UK and their sterling pensions are not sufficient for life in a wealthier Spain. Sterling has continued its slow slide against the euro and the future looks very grim for these British retirees.
It would seem to me that if you are young enough, one should think about generating some kind of income within the Philippines. It would be very foolhardy to think that the Peso/Dollar/Euro rates will remain static and even at current rates I believe 1500 dollars a month is the absolute minimum one would need to live in Manila; and you certainly will not live high on the hog. I would be delighted to be wrong but I do think the day of the American or European retiring to the Philippines, Thailand or Malaysia on meager pensions is over.
Having said that I believe there are enormous opportunities and possibilities in the Philippines; but you have to think outside the box.
Jody
Hi jody – Wow! $13,000 per year for a private school here? That must be one of those International schools. My kids go to Ateneo de Davao, which is the best private school in the City and the tuition is about $1,500 per year. But, indeed you are correct that living in the Philippines has gotten much more expensive than it once was. I have a friend who moved back to the States a couple of years ago, and he tells me that he lives cheaper in the USA than he did here in the Philippines, which is amazing!
Hi Bob, i am with you, It is interesting to me that Americans are very arrogate about the wonderful greenback. I am a American & can not believe how the U.S. people think it can not happen to them.
I know other countries are having massive problems as well, but some are better off there others. Like S.E. Asia, When a country is at the bottom there is alot of room for it to prosperes . Example look at China 10% growth in 1 year.
I hope the greenback remains stable until i can get most of my cookies out before the demise of this over leveraged country. Thanks Bob for someone who see’s the trends that are right in front of everyone’s face. Scott
Hi Scott – I see trends… I’m just not always right in what I see, though! 😆 I hope I am wrong on this one.
Hi Bob, This is off the subject, but can you tell me who to use to form a corporation so i can buy this resort in Palawan? I think this is the best way to by my dream place. I assume you have started many corps. in the Philippines Thanks Scott
Hi Scott – Actually… nope, I have never started a corporation in the Philippines. My best advice would be to find a good attorney that you trust, and let him handle it for you.
Your right John, the dollar is still the best bet on currency on the world market, but it has a very real potential to fall. Virtually every major federal govt. program ..and their are hundreds of them , are in serious trouble financially…even the post office is running in the red !!. Tax revenues have plummeted with the down turn, our deficit has expanded to almost 13 trillion, apx. 4 billion a day! 13 States are on the verge of bankruptcy. and our slick talking president added health care onto all this!! What a smart man ! IMHO removing the gold standard was a fatal flaw, Nixon was coerced by the bank cartels to do so this action benefited the banking industry tremendously. Virtually every income sector in this Country is in a downturn couple that with the expanding deficit and its easy to see thing have a very real potential to get economically ugly. My point is the dollar is running on past perceptions of resilience, we may be the strongest currency out there but this only means our house of cards is bigger than their house of cards.…I don’t think the dollar will collapse but.. it does not have to, a decline of 50% would be an world economic tsunami. There are things occurring in the shadows of Washington that have many raising eyebrows. Something is rotten in DC !
Hi brian – has the post office ever not run in the red? 😆
Hi Bob – Prior to the start of home & business delivery in 1863, the Post Office turned profits. 😉
(Working for the PO was a big political payback [patronage] to supporters of an administration’s successful election, until the 1883 passage of the Civil Service Reform Act [Pendleton Act].)
Hi Bob- When you did your predictions earlier, I predicted we (AUD) might reach parity with the USD. I am now probably not quite so confident, but our exchange rate with PHP is looking pretty good for us. Cant wait for October, my next visit.
Hi Anthony – Ha ha… you Aussie boys are catching up on the exchange! Well, I’m not sure if you are catching up, or we Americans are falling down close to your level! 😆 Just kidding of course.
Hi Bob,
Great article and a lot of insightful comments.
As a Canadian, I have never seen our neighbours to the south in such a melancholy funk. What ever happened to good old-fashioned Yankee ingenuity? Where’s the ” can-do “, ” get ‘er done! ” spirit Americans are famous for? I tend to agree with Warren Buffett when he said not too long ago that ” those who sell America short will end up on the losing side of the trade.” Imagine for a minute if someone like former President Ronald Reagan was in the White House. How different would the mood be?
That being said it is clear that there are serious economic hazards on the horizon. Every country in the developed world is borrowing money to buy themselves out of the recession at the same time! Where will all this money come from? It can only come from the printing presses so that explains the decline in the US/PhP exchange rate. So diversifying into peso denominated revenue sources makes sense. Inflation will eventually kick in and it ain’t gonna be nice.
I think Asia and perhaps Latin America will be the growth story for the forseeable future. But the U.S.dollar will remain the world’s reserve currency. The big change will be that hard assets will be re-priced upwards to offset a devaluation of the dollar, yen and euro. Aus$ and Canadian$ will remain strong as long as commodity demand remains strong.
America may be down but don’t count it out!
Hi Randall – Thanks for your support! We shall see what happens. The US could still come back, but things are not looking good!
Remember Rome?
Hello Brian,
Concerning this subject, I stayed up late last night responding to your comment and agreeing to your last sentence and telling Bob that was A GOOD RESPONSE. I hit the wrong key I guess, and deleted all of what I had to tell you and the other readers on whats’ going on here in the U.S. AND MY FEELINGS AND FACTS on why the U.S. DOLAR HAS DECLINED. So to sum it up briefly because I can’t let this subject go without me saying something and this is the next day and I have to be quick because my son will be going back to Afganistan in the morning from R&R. I agree to Bob’s reply from Randall Jessup, Scott’s comment & your response which was this is just the tip of the ice burg. And last, Remember Rome ! That summed it up for me.
I’m very worried for all us and our kids and grand kids but yeah I’m still planning to move to the Ph. even if it goes U.S. 40 or below because to me that is still a lot of money in pesos.
Thank you and everyone else here on LIP.
DALE
Hi Dale – All the best to your son! I hope that his tour in Afghanistan goes smoothly and safely.
Thank you Bob, I appreciate that.
That’s for sure, brian!
Good article Bob. As you said in one place, I too am a bit surprised that someone would make a move internationally and then move back based on perhaps a 5% cut. If you live internationally you risk this, no matter what currency you are based in.
If you live in the US, you are already locked into it … I was back in the US in February 2010 and I couldn’t believe the bills I saw people paying … amazing how far down my country has gone in only three years.
In the time I have lived here in the Philippines the Peso versus the USD has gone from a fraction over 50 to down to 40 flat one sad day.
As you point out we could well be heading to 40 to the dollar or even worse. (you folk have to remember the (modern day, independent) Philippine Peso started life 2 to the USD … it’s a free market economy, nothing prevents the Peso from gaining even more strength.
Many US folks I talk to are spring-loaded to bad-mouth the Philippine economy … third-world-country, ‘banana republic’ economy, etc.
Fact is, there is no global recession here to speak of, Philippine business is doing very well, and the banks and insurance companies in the Philippines are not allowed to do the insane ‘derivatives’ and other parlor tricks that are still common n the US.
So diversify as Bob says, and if you’re budget is so thin you don’t have 5% or 10% to spare, moving anywhere overseas is very risky, you might want to consider staying in the USA for now .. the US Dollar _will_ change in value against other currencies, always has, always will, that is a certainty. How much and even which direction is the part that is always unknown
Hi Dave – Thanks for adding your thoughts on this topic. Like you say, a swing of 5% or even 10% is not much compared to what could happen over a longer term, and because of that, it really should not be a reason to bug out and run home to the States. It’s all part of living abroad. There is one way that an expat could avoid such issues and that would be to become 100% divorced from the Dollar, and just live and earn 100% on Pesos. Once they do that, the exchange rate doesn’t matter. Fact is, though, that few of us could do that – most of us have some connection to the Dollar, maybe a business back home, a pension, Social Security or whatever. So, because of that connection to the Dollar, we need to have a plan under which we can survive the swings that occur naturally.
Bob, as I wrote in a comment on your previous article, it is not just the movement of the peso against the dollar, but also inflation rates that are important in determining the welfare/finances of Americans living in the Philippines. If an American’s income is FIXED (at say $1,000 per month from an annuity), you need to add the exchange rate depreciation (about 5%) to the inflation rate in the Philippines (about 4%) to get a (more or less) decline in purchasing power for the American of about 9% over the past year. If you do this for several years, the impact is horrific.
If the American’s income is indexed to US inflation more or less, as is Social Security and some pensions (for example for the military), then the DIFFERENTIAL inflation rate is important, e.g., subtract the 1% US inflation rate from the 4% Philippine inflation rate to get a net of 3%, and hence a decline in this hypothetical American’s purchasing power in the Philippines by 8% 5% + 3%). (FYI, this 8% decline is equal to the decline in the REAL US$/Peso exchange rate.) Again, do this calculation for the past five years or so and see the impact on the REAL wealth and incomes of Americans here: YIKES.
As for how to protect yourself by hedging against the falling dollar – if, as you predict, it will fall – there are other ways (and MUCH safer ways) to do this besides generating peso income. My observation (fortunately not my experience), is that most investments by foreigners (aside from investing in a sari sari store for their wives) go kaput for the simple reason that the foreigner has NO idea about doing business in the Philippines or in the specific investment sector in which he/she tries to operate. (My favorite is a retired taxi driver who went into the copra trading and money lending business, But this is a separate diatribe.) Other ways of hedging against a fall in the (real) US dollar/peso devaluation are to:
1. Move assets out of the US and put them into the Philippines in some form: land, bonds, stock market, and so on. Sell your US house, cash in your IRAs, and so on, and get your money in pesos.
2. Even if the American does not have US assets, possibly he/she can borrow in the US (against his/her pension or annuity) and move the money to the Philippines to place it in a Philippine income earning asset (as in #1).
Now to address the question of the future fate of the US dollar: TOUGHIE! I can tell you where it is going in the famous economist’s long run: down, down, down, glug, glug, glug. But what it will do in the short or even medium term: impossible to determine – and if YOU now, then let me know so that we can speculate on the foreign currency markets and make a killing.
How do I know that the dollar must fall? The US is running a massive, unsustainable trade deficit. This means that we are importing goods and services (think of all those made in China products) and the selling country is receiving IOUs from the US, bits of paper if you want to think simply. Eventually, foreign countries will tire of receiving bits of paper (you can’t eat them or wear them or live in them or use them) and will become increasing unwilling to exchange real goods and services for IOUs. This disenchantment with the US dollar is already happening, e.g., China is diversifying its foreign exchange holdings out of dollars. When it happens more strongly, the dollar will fall further, US exports will increase and, eventually the horrendous US trade deficit will decrease and maybe even be corrected to a surplus. This happened in the US, 1985-1990 (remember Japan as #1, until the dollar fell and Japanese exports tanked?) and not only can, but must happen again. Sorry, I cannot tell you when this will happen, only that it must happen.
For those of us who are in the Philippines for “the duration”, the timing does not matter much. If the real value of the dollar against the peso will eventually fall (and trust me if MUST), then act NOW to protect yourself. Also for those on limited incomes who cannot protect themselves by hedging, bear in mind the experience retold of British ex pats in Spain. Many of them are currently @#$%^&*()(*&^%$#@$%^&*’ed. Want to be next?
As a final note, the value of the dollar on world exchange markets is not determined DIRECTLY by the US budget deficits or by how messed up the US or the US economy is. As mentioned by many commentators, many other countries around the world have worse economic problems, but their currencies are appreciating against the US dollar (the yen and the euro). If you don’t accept this, my threat is to give you another lecture on exchange rate determinants. Do you really want this?
ProfDon (MBA, PhD, Harvard)
Hi ProfDon – Yep, I did write in the article about the effects of inflation coupled with the declining value of the dollar. I personally, though, do not believe that the inflation rate here in the Philippines isn’t in the 4% range, I think it’s at least 7%. When I see store prices, it seems even higher than that!
Hi.
Will this affect the foreign investors to start a business in the philippines? I hope not for philippines has the potential to rise above also like thier nieghbor countries.
Hi doing business – of course it will! The cost of doing business here is going up every notch that the Peso climbs, so fewer will come here to do business.