Dave Sather's Money Matters: What does 'devaluing the dollar' mean?
April 19, 2011 at 4:02 p.m.
Updated April 18, 2011 at 11:19 p.m.
Many times, financial news outlets reference the "devaluation of the dollar." What does this mean and what are the implications?
Recently, Carol and I were in Spain. She was speaking at an academic conference. I was there merely to carry her bags.
One particular day, as we strolled through town, my bride started to get hungry. With our command of the Spanish language being rather thin, we decided to venture into the golden arches of McDonald's.
Although it is rather ironic that we would travel halfway around the world to eat at Mickey D's, it was familiar, and we could order simply by pointing and not butchering the language any further.
Our order was easy enough: a Big Mac, a chicken sandwich, two medium fries and two medium drinks. The total bill came to 13 euros. As I ate my Big Mac, I started doing some math - converting euros into dollars. Holy crap! I just paid $21 United States for some greasy fries and grade D beef. Haven't these people ever heard of a "value meal?"
Could it really be that much more expensive to produce a fast-food meal in Spain than in the United States? Maybe that is part of it. But as I got more and more irritated at the price of my meal, I pulled out my computer (thankfully McDonald's had Wi-Fi) and started researching the correlation between the dollar and the euro.
There, plain as day, was a chart showing me that just in the last nine months the dollar had lost 18 percent of its purchasing power relative to the euro. I started to get a sinking feeling that this trip was going to cost quite a bit more than I had anticipated.
The dollar's relationship to the euro is not unique. Over the same timeframe the U.S. dollar lost 21 percent of its value relative to the Australian dollar and 23 percent relative to the Swiss franc.
Although the McDonald's experience is just one example, it gives you an idea of what happens when our currency is devalued.
In general, when you devalue one currency, things manufactured in other countries that use other currencies become more expensive - all things being equal.
When we travel to other countries, our money buys less in terms of food, lodging and virtually any other service.
Furthermore, it makes imports into the United States more expensive for Americans. This starts to give you an idea of why this game is played.
The U.S. government will intentionally devalue the dollar knowing that foreign companies will have a harder time selling their goods to Americans. Additionally, when the U.S. dollar is devalued, it makes the products manufactured in the United States more affordable in foreign countries. This can stimulate U.S. exports to other nations.
On the surface, this may seem like a great way to prop up a country in need of additional sales and jobs. However, we are not the only ones playing this game. Any country with its own currency is madly running the printing presses day and night - all in an effort to make its products sell better.
Unfortunately, we do not live on a self-contained island. We will continue to import things - such as oil. As such, it is the average consumers who get hurt as their paychecks simply don't buy as much of the goods and services they need each day.
Whether you chalk it up to currency devaluation or inflation, the outcome is the same. A dollar just doesn't buy what it used to.
Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.