How do we do this [NA]

[Keith Lane]

A very few of you may remember my question about oil pricing and the profits gained by increases thereof a month ago.
http://www.pilotsofamerica.com/forum/showthread.php?t=21451

Thanks to Andrew for a very complete answer. It made interesting reading and served as a cure for insomnia as well.

Now, another question comes to mind.
A few years ago I was involved in a project in Estonia. Estonia had not at that time converted to the Euro, but was still on the national currency, the Kroon. At the time, the Euro was about $.85. We lived pretty well at those rates. Of course, the Euro is trading, as of today at $1.57. As we all know, this adds quite a premium to not only the price of travel overseas, but to oil as well.

My question:
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What is the main cause of the devaluation of our dollar in such a dramatic fashion, and more importantly, what will turn out dollar around.
I'm sure if we could wave the wand and make it trade 1:1 with the Euro, oil would be a bit cheaper.

Forgive my trying to get a free education in global economics, but collectively I think there is more diverse knowledge on this forum than in most any venue I can think of.

 

[Pi1otguy]

Not a econ professor, but I'm willing to guess that oil prices are more involved in our consumer prices then Europe. We eat oil, we build with oil, and even cover ourselves in oil.

Secondly, I'd guess that oil prices and inflation are somewhat circular. Oil prices go up, transportation cost goes up, material cost goes up, inflation goes up, oil prices go up due to inflation, etc. Supply & demand on a national level is less relevant considering that oil consumption has flattened out and during past price hikes even declined.

 

[astanley]

My question:
​

What is the main cause of the devaluation of our dollar in such a dramatic fashion, and more importantly, what will turn out dollar around.
I'm sure if we could wave the wand and make it trade 1:1 with the Euro, oil would be a bit cheaper.

What devalues a currency, short form:

• Inflation relative to other countries is worse (e.g. higher)
• Decrease in real interest rates in the home country versus others (real rates = market rate minus inflation)
• Slower economic growth compared to other countries (e.g. capital is not invested in your country, but others)
• Political and economic risk

(you can learn more by googling the "Equilibrium Exchange Rate", which is partly academic fiction, but alas, works)

Is there one cause? No, not really. A tightening of credit, with higher rates but higher implied risk, leads to currency fall offs. An increase in headline inflation leads to currency fall offs.

Is there a single, silver bullet? No. Anyone who tells you such is trying to sell you something.

Cutting our economic dependence on oil is one step. Stronger credit programs and less boutique financial BS is another. Growth incentives are another. Anti-inflationary measures and money supply management are a third. Cheap imports are another problem; our trade deficit is almost $700B this year, but if you normalize for non-energy, non-Asia, our trade deficit is a paltry $75B. (Translation: China, Japan, and Oil account for a $625B trade deficit yearly). Our yearly deficit retarded $100B this year, primarily thanks to a cheap dollar driving higher US exports.

Just my $0.02.

Cheers,

-Andrew