Tuesday, June 30, 2009

A PERSONAL VIEW OF THE GLOBAL CURRENCY CRISIS

Growing up in Asia, we found it hard to understand the “real” value of all the different currencies we had to use when moving from country to country. In some currencies small numbered bills and coins bought a great deal and in other currencies the bills had numbers in the thousands and were worth far less than a dollar. Many Asian currencies were, and still are, illegal to trade outside their country so the exchange rates were “official” rates set by the government. The official rates were far higher than what the currency would have actually purchased, which resulted in an illegal “black market” where residents traded their currency for other currencies at a lower rate.

To understand the comparative values of these different currencies, we used an "ice cream cone equivalency"; the amount of currency it took to buy an ice cream cone became our basic value measure. This equivalency gave us a way to evaluate the cost of things: a taxi fare in New Delhi was 5 cones, a T-shirt in Jakarta was 4 cones, a piece of jewelry in Thailand was 10 cones, and a class trip was 300 cones. This comparison method made the currency values tangible and functional to us.

After we moved back to the US, we continued to convert money into equivalencies, but our comparison evolved from ice cream cones to weeks of vacation in Hawaii. When we considered the purchase of a new couch, for example, we equated it to a week of vacation in Maui which allowed us to understand our spending choices and the real value of our dollars at that time. The value of the dollar has varied wildly over the past thirty years which changed the value of a trip to Maui from one couch made in North Carolina in 1979 to ten couches made in China in 2009.

Since world-wide commodities, such as oil, are priced in US dollars, the US dollar has become the de-facto world currency. Countries such as Saudi Arabia, China, and Qatar control the price of their currency by setting their “official rate” in US dollars. China, Japan, and many other countries have been placing their US dollars, earned from selling manufactured goods and commodities, into US government Treasury Bills and Securities.



The massive US stimulus spending package and US economic downturn have led these nations, notably China and Japan - the two largest holders of US debt, to become very concerned about a huge loss in the value of their assets held in US dollars. These countries are reducing the amount of US dollars they own and converting them to gold and other currencies in order to find alternative ways to hold their assets and maintain the value of their currencies. The international divestiture of the US dollar is causing its rapid devaluation. Some have been calling this an international currency crisis.

As a result, many people are convinced that the US dollar will soon be formally devalued by the US government. But since currency is only valued by comparing it to something, we wonder what the US dollar will be devalued against? The old metric of valuing the dollar with gold was thrown out in 1971 and in its place the value of the dollar has only been its ability to buy basic commodities in the world market like food and energy.

Here in Hilo, Hawaii a devaluation of the dollar would result in higher prices for foreign imported goods, but a great deal of food is grown on our island and diesel and gas can eventually be replaced with bio-fuels. Though for most of the US this devaluation of the US currency will not cause instant change, we believe Hawaii’s proximity and popularity with Asia may result in an immediate and disproportionately large influx of visitors and real estate buyers from Asia. We are pretty sure that we are not the only ones that measure the value of their currency in “weeks of vacation in Hawaii”.

7 comments:

Victoria Hokulani said...

We may indeed be already seeing an influx of Asian Real Estate investors with the recent upturn in Big Island Real Estate. Also, I have a big feeling that new Asian food market across from BigIsland Chevrolet is owned by Chinese. I know for a fact that Large Format Printing in the refurbished house on Kanoelehua near the airport is Chinese owned by a very nice couple from China. They apparently felt confident enough in the future of this island to get into the blueprint reproduction biz. Also, next door to that biz is Concept Constructions new building. So, something is about to happen around here. Every time I go route hubby's plans at the Department of Public Works I wish I could transmutate myself into a digital fly on the wall so I could see the projects coming down the pike. I think an investment into a Rosetta Stone Dvd on Mandarin is looking more and more attractive.

AMIT said...

Yes currency rates changes everyday which is very hard to tell about the rates of tomorrow.

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Keahi Pelayo said...

Do you see any value in going back to a "gold standard".
Aloha,
Keahi

Kololia said...

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Kololia said...

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Do what is best for All, not just a few.

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