Dollar devaluation: what it means for your money

For what it’s worth, economist Peter Schiff was spot on when he forecast the 2008 financial crisis two years before it happened. In 2006, he said, “The United States is like the Titanic, and I am here with the lifeboat trying to get people to leave the ship… I see a real financial crisis coming to the United States.” This week, he made a similarly dire statement, stating that, “the U.S. economy is poised on the biggest economic disaster in its history” thanks to the devaluation of the dollar to fund the bank bailouts.[1]

Schiff isn’t the only one sounding the alarm. But if he’s right this time around, what does it mean to you, your purchasing power, and your investment strategy? It’s a complex question that even the top economists struggle to answer clearly. That said, I'll do my best to break it down in a meaningful way.

At the most basic level, ‘dollar devaluation’ refers to a decrease in the value of the U.S. dollar relative to other global currencies. This can happen for various reasons, such as changes in interest rates, inflation, or international trade imbalances. When the dollar's value goes down, it means that every dollar is worth less than before, which can have significant economic consequences. Schiff sees the Fed’s response to the recent bank failures as a key part of the equation. “When people want to get their money out of banks, the money isn’t there. So the only way people can get their money is if the Fed prints it. But if the Fed prints it, it just destroys even more of the value. So, it accelerates the momentum for a spiraling inflation… The dollar is being debased in order to fund the bank bailouts.”?

When the dollar loses its value, if you’re holding US dollars—in your wallet, in a high-interest-rate savings vehicle, or even under your mattress—your purchasing power drops. If you’ve spent any time traveling in countries where the currency is stronger than the dollar, you have likely felt this pinch first hand when your budget seems to shrink right before your eyes! But though it’s not a trend to be ignored, the devaluation of the dollar is not a new phenomenon, nor one that should cause serious alarm. Over the past four decades, the DXY (which is used to measure the value of the US dollar relative to a basket of foreign currencies) has had a price range of roughly 75-125. On April 26, 2023, the dollar was valued at 101, putting it smack in the middle of that range. In reality, general inflation is likely to have a larger impact on your day-to-day spending power than the current devaluation of the dollar.

Looking at the longer term, it’s also unlikely that your retirement savings is poised to take a major hit. If, like most Partner Physicians, you have exposure to International ETFs and Mutual Funds, a decrease in the dollar's value can affect the performance of your investments. For example, you may have investments in an ETF that includes foreign companies whose profits are denominated in a local currency (which is the case for the majority of foreign Mutual Funds and ETFs). If that foreign currency appreciates (or rises in value) relative to the dollar, then the ETF will have better earnings. In contrast, if the dollar appreciates against that foreign currency, then the ETF will have reduced earnings. Depending on the global economy, that balance can tilt in either direction. Knowing that, if the dollar is headed for a significant and longer-term devaluation, one step you can take to protect your nest egg is to own international ETFs and Mutual Funds to gain a hedge against devaluation. ?

This strategy may also help protect your assets if the dollar loses its status as the world’s reserve currency status—another theoretical potential that’s keeping some economists up at night. Personally, I do not think this issue should be causing any restless nights for Partner Physicians. The reason: when valuing (or, in this case, devaluing) currency, there is a limit to the amount a company can hold in a government's bonds while settling payments in that currency. So a change in either direction tends to be very slow. Plus, there is no real alternative to the dollar at the moment. The US government bond market is currently twice the size of Japan’s, which is the second-largest government bond market in the world. Europe is significantly smaller than Japan, and China is significantly smaller than Europe. There’s just not much competition.

In a nutshell, I wouldn't worry too much about dollar devaluation—yet. To quote another respected economist, former treasury secretary Larry Summers said this in a recent interview: "Europe is a museum, Japan is a nursing home, China is a jail. If the dollar is to lose its status, it has to lose it to somebody." At Protection Point Advisors, we are keeping a close eye on the dollar, as well as on the many other factors that can impact your financial health. At the moment, the best defense we see is adding some additional foreign-currency investments to help diversify your portfolio and hedge against a devalued dollar. If the situation becomes more extreme and we think additional action is needed, we’ll let you know. Until then, try to ignore the headlines, trust the strength of your strategy to support your financial future, and sleep well.

[1] NTD News Monday, May 1, 2023