Expensive Gas, Cheap Dollars, and the Real Estate Market
I’ve been doing a lot of reading lately about how weak the dollar is compared to other currencies.
The chart below shows you how many Euros you could get for a buck over the last ten years, for example.
As you can see, the dollar’s value has been sliding now since about the year 2000, since about the time the Supreme Court appointed George Bush president. (Darn, are my politics showing again?)
One of the things that happens when the dollar is weak is that the price of things like gold and oil go up. Steve Forbes recently estimated that “more than $50 of the per-barrel price of oil today comes from inflation and the speculation that inflation induces.” So it’s not simply that Arab Sheiks and oil companies are fat cats, sitting around reaping huge profits — though I’m sure some of that goes on as well. The high price of oil is a largely a reflection of the low value of the currency used to price it — the dollar.
OK, so why is the dollar low? Well, remember that war we’re fighting in Iraq? That cost about a half trillion dollars so far (and you thought real estate commissions were expensive)! The Bush tax cuts to rich people like the oil fat cats we mentioned earlier will lose us about 1.7 trillion dollars in revenue based on what’s already been passed into law.
Partly as a result of these reckless policies, we have these huge budget deficits, so we borrow money to the tune of about $2 billion per day to finance a national debt of about nine trillion dollars (more or less).
Aren’t big numbers fun? To give you an idea of what nine trillion dollars is, if you spent a dollar every second, it would take you over 285,000 years to spend nine trillion dollars. Nine trillion dollars laid end to end would easily make it well past Jupiter — almost as far as Saturn.
And to think some people are worried about Social Security.
Now you’d think that having nine trillion dollars in debt is problem enough, but meantime, there’s another problem. The government borrows money largely by selling government securities such as Treasury Bills. High interest rates on such instruments relative to securities available from other governments typically strengthen the dollar, while low interest rates weaken it. This stands to reason. Investors want a high return on their investment. So low interest rates here mean more people can buy homes or refinance their existing homes, but it weakens the dollar, which in turn pushes the price of gas up.
With this in mind, here are some scenarios for 2008-2012:
- Catastrophic collapse in US currency. I don’t really know if that’s a likely scenario or not. I’m not an economist, but I play one on the Internet.
- Continued non-catastrophic decline in the value of our currency, pushing gas prices up higher while interest remains low. This is probably “good” from a real estate perspective but bad from any other measure you can think of.
- Rising interest rates coupled with falling home prices, followed by a gradual return increase in the value of the dollar over time.
