We warned you about the dollar...sort of

Last week, the US dollar hit a 14-month low against the euro, coming just shy of the point where it takes $1.50 to buy one euro. Commodities priced in dollars, such as oil, went up in price to off-set this decline, and the weak state of the US greenback set off a certain amount of discussion in the media. But in keeping with Vanguard’s mission, we warned you about this decline nearly two years ago… Sort of.



In this story, which was shot mostly in the fall of 2007, Adam Yamaguchi looks at the reason behind a phenomenon that we’d been noticing first hand as we traveled the world on stories: In recent years, the dollar seemed to buy less and less. In July of 2000, when the US government had a surplus, I was shooting for MTV in Germany with Laura Ling, and less than $0.90 US bought a euro, and Europe was charming.

By the time “The Poor Dollar,” was shot, Europe was challenging. Scenes of Adam experiencing first hand the weakness of the dollar versus the British pound and the euro, of Tracey Chang witnessing the weakness of the dollar versus the Canadian dollar and Filipino peso, are interspersed with Adam’s look at the causes of the dollar’s decline: The US trade deficit, the US government’s budget deficit, and overspending by US consumers—throughout this decade 70% of the US economy was based on consumer spending. In fact, our spending what we didn’t have was the engine of the world’s economy.

And, indeed, throughout the first half of 2008, just as we told you in "The Poor Dollar," oil prices skyrocketed, in part due to speculative frenzy—the stock bubble had started bursting the previous fall, driving speculators to new areas—but in part due to the dollar’s downward spiral.

So at that point, we felt that Vanguard had fulfilled its mission of giving you an early heads up on important changes in the world. But, when we’re doing our job properly, we’re just an early warning system, not prognosticators. In looking at the dollar’s decline, we didn’t factor in the effect a dose of worldwide financial collapse would have on the greenback. As America plunged into the deepest recession it’s had in 70 years, Americans cut back spending and started saving. The trade deficit dropped also. Oil prices collapsed. And the dollar got stronger.

But as the US economy revived a bit during the summer and the US government hit its highest proportional deficit since 1945, the dollar has been sinking again, and you can take another look at "The Poor Dollar." Our warning seems to be germane once again.

Last week, U.S. Treasury Secretary Timothy Geithner warned that after the recession is over, the US government dials back on deficit spending, the only way the dollar can be strengthened is if Americans learn to live within their means. And that raises a larger question, one that Laura and Adam looked at this spring in "Lost Vegas."



That is, can we continue to base our economy on US consumers supporting the world, and on stock, real estate, and commodity bubbles that go with that, or is the only way to avoid our country declining like our currency is to find some other way forward? We don’t know, but we’re pointing out the question.