The devalued dollar in uncertain times

Your dollar is not as valuable as it was a couple of years ago, and this unstable time looks like it's far from over.

"The economy is very hard to exactly predict. But, in general, there seem to be a number of forces at work right now that are leading us into what most people would consider a downfall or a recession," said Terry Alexander, senior lecturer in economics.

"It's kinda teetering on the edge of a hill where one misstep you can fall down the hill. But there's no reason why, if things work out well it would continue to build on a stable path."

Though data from unemployment and wages appear to be stable, the economy is nowhere near being in the clear and could enter what we have heard for a while now - a recession.

An unstable market

A recession is two straight yearly quarters where the gross domestic product - the value of goods and services produced in the country - drops, and jobs most likely decline. The National Bureau of Economic Research, a private group of economists, decides whether the U.S. is in a recession and makes an official declaration. "Some [sectors] are probably in a recession right now, but we categorize a recession by a national level," Alexander said.

Currently, the housing, construction and financial markets are in trouble, but other sectors may be OK. The housing crisis started when banks gave loans to individuals who typically would not have qualified for them. For a few years, these high-risk loans didn't cause problems because housing prices were steadily increasing. If a borrower ran into financial trouble, he could sell his house for more than the amount of the loan.

When housing prices stopped increasing, borrowers lost the option of selling their houses, and banks were forced to foreclose on houses as people declared bankruptcy or defaulted on their mortgages. The first signs of the housing crisis appeared last spring. "There is not a large demand for these number of houses that are appearing on the market, so that's compounding the problem. It all started last spring and we haven't weathered that by all means," Alexander said.

Peter Orazem, university professor of economics, said the economic problems are essentially in certain areas right now, and the rest of the market seems steady. "It's mainly the financial and housing sectors that are weak. We have yet to see if it seeps into other sectors," he said.

Orazem noted that Bank of America's recent buyout of Countrywide may have saved the company from bankruptcy. "It was speculated that Countrywide would have gone bankrupt," he said. "The buyout prevented a domino effect that would have rippled to the several people invested in Countrywide."

Alexander said the question is still whether or not Bank of America can keep Countrywide's business dealings without putting itself at risk. "The Pella factory closing in Story City is a more localized item the housing crisis has created. There is simply not as much demand for the services the company made."

Reports on Christmas shopping have shown weak sales, and the crunch from high gas prices and an unstable economy are affecting people's buying habits. If the final report shows a decline, it will be a time ther there is a fall in personal consumption, which makes up 70 percent of the economy.

"It seems evident in autos, housing and in Christmas sales that people aren't buying as much as in the past," Orazem said. "The question will be, 'Is it negative or not?'"

The falling dollar

E. Kwan Choi, professor for the center of agricultural and rural development, said that Ben Bernanke, chairman of the Board of Governors of the Federal Reserve, could have prevented the current economic situation by not raising interest rates to the extent he did.

Bernanke oversees the central banking system of the United States. "I think Bernanke made a mistake - he wasn't as prudent as his predecessor. He raised interest rates 16 times, which was a shock, and people were not ready for such a drastic adjustment in the interest rate," Choi said. "Interest rates rose far too fast after they had been lowered a few years ago."

However, Choi said there is nothing wrong with a low-valued dollar. "The value of dollar will adjust to achieve a balance of trade with other countries," he said. Choi emphasized the large trade deficit the U.S. has with China and the low value of the Chinese currency compared to the U.S. dollar.

"When you owe a lot of money to foreign countries, you want inflation," he said. "If you are in a recession, like we are, the pain of these debts are even higher because prices are not rising."

Choi said the Chinese renminbi trades at an 8-to-1 ration with the U.S. dollar and that the U.S. owes the Chinese government $4.1 billion. "I do not see the dollar getting stronger any time in the future," Choi said. "It will continue to decrease."

A weak dollar also means that imports are more expensive and exports are less expensive. "If the value of the dollar weakens 30 percent, it means you must pay 30 percent more," Alexander said. Orazem said students who are studying abroad should take note of the current value of the dollar, since therate has continued to change. "Our current situation definitely makes it more expensive to study abroad," he said. "Students need to watch the [exchange rates] because it can change frequently."

The price of oil

Oil, which briefly hit $100 a barrel a few weeks ago, continues to burn higher portions of budgets. And even with higher prices, people are not changing their driving habits.

"There is this lurking evil with high oil prices that's been on the horizon for basically the last two years that we have been able to overcome, but given that along with the SPM crisis [subprime mortgage; the housing crisis], it remains to be seen whether we'll be able to whether we will head into a recession," Alexander said.

Orazem said other energy sources are becoming more important. "The high energy prices make things more expensive. It makes us really consider to switch to other fuels like coal, natural gas or nuclear - even though we are very limited there," he said.

Orazem said the price of oil is now taking up a larger portion of family and individual budgets. For the average person, 3 percent of the budget goes to gasoline. Now it's around 5 percent, which causes a weaker demand for goods and services," Orazem said. "The price of oil has doubled since 2003. That eats into ordinary consumer buying power."

Source : Iowa State Daily