When Money Dies: The Nightmare of the Weimar Collapse by ADAM FERGUSSON

[solidsilver]

a) http://useconomy.about.com/od/tradep...llar_Value.htm


Dollar Is Losing Value Over the Long-term:
The dollar's value can be measured by exchange rates, Treasury notes and the amount of dollars held by foreign countries. These three measurements usually are in sync with each other. No matter how you measure it, the dollar is losing value over the long-term. Here's why:
The U.S. debt is over $13 trillion. Foreign holders of this debt are concerned that the U.S. will let the dollar value decline so the relative value of its debt is less.
The large debt could force the U.S. to raise taxes to pay it off, which would slow economic growth.
As more countries join or trade with the European Union, demand for the euro increases.
Foreign investors are diversifying their portfolios with more non-dollar denominated assets.
As the dollar loses value, investors are less likely to hold assets in dollars as they wait for the decline to stop.
The Dollar Value Is Measured by Exchange Rates:
The U.S. dollar is most easily measured by its exchange rate, which compares its value to other currencies. Currency exchange rates allow you to determine how much of one currency you can exchange for another. Exchange rates change every day because currencies are traded on the foreign exchange market, known as forex. A currency's forex value depends on a lot of factors, including Central Bank interest rates, the country's debt levels, and the strength of its economy. Most countries allow their currencies to be determined by the forex market. This is known as a flexible exchange rate.

2010 - The dollar rose 6% against the euro (January 1-April 17) due to the weakness of the EU's economy.

2009 - The dollar fell 20% (March 3-December 1) due to concerns about the $12 trillion U.S. debt.

2008 - The dollar strengthened 22% (April 2008-March 2009) as businesses hoarded dollars during the credit crisis.

2002 - 2008 - The dollar fell 40% as the U.S. debt grew 60%. In 2002, a euro was worth 87 cents vs $1.36 on April 13, 2010. (Source: Federal Reserve Foreign Exchange Rates; Federal Reserve Bank of New York, Historical Exchange Rates)

The Dollar's Value Is Measured by Treasury Notes:
The dollar's value is usually in sync with demand for U.S. Treasury notes. The Treasury Department sells notes for a fixed interest rate and face value. Investors bid at a Treasury auction for more or less than the face value - and can resell them on a secondary market. High demand means investors pay more than face value, and accept a lower yield. Low demand means investors pay less than face value and receive a higher yield. That's why a high yield means low dollar demand - until the yield goes high enough to trigger renewed dollar demand.
2010 - The dollar strengthened 1.5%, as the 10-year Treasury note yield fell from 3.85% to 3.79% (January 1-April 17).

2009 - The dollar weakened as the 10-year note yield rose 52.6%, from 2.15% to 3.28% (January 15-December 1).

2008 - The yield dropped from 3.57% to 2.93% (April 2008-March 2009), indicating strong dollar demand. Prior to April 2008, the yield stayed in a range of 3.91% - 4.23%, indicating a stable dollar demand. This made it a world currency. (Source: U.S. Treasury, Daily Treasury Yield Curve Rates)


Overall, the value of the dollar is weakening as measured by both exchange rates and by Treasuries. The world is in a recession, investors want a safe investment, and the dollar is looking less safe thanks to the $12 trillion U.S. debt. The higher the debt, the less safe the dollar seems. To fund the debt, the Treasury is auctioning more notes than there is demand, causing yields to rise.

Value of the Dollar as Measured by Foreign Currency Reserves:
The dollar is held by foreign governments who have an excess of cash, held in foreign currency reserves. This excess happens when countries, such as Japan and China, export more than they import. Since these countries are concerned about the declining dollar, there is a decline in the percentage of reserves held in dollars.

As of Q4 2009 (most recent report), there was $2.8 trillion in foreign government reserves held in dollars. This represents 62% of total measurable reserves, down from Q3 2008, when dollars comprised 67% of reserves. Since the percentage of dollars is slowly declining, this means that foreign governments are slowly moving their currency reserves out of dollars. In fact, the value of euros held in reserves increased from $393 billion to $1.25 trillion during this same time period. Although it is increasing rapidly, it is still less than half the amount held in dollars. (Source: IMF, COFER Table)

How the Value of the Dollar Affects the U.S. Economy:
When the dollar declines, it makes U.S. produced goods cheaper and more competitive when compared to foreign produced goods. This could help increase U.S. exports, boosting economic growth. However, it also leads to higher oil prices in the summer, since oil is priced in dollars. Whenever the dollar declines, oil producing countries may raise the price of oil to maintain profit margins in their local currency.

For example, the dollar is worth 3.75 Saudi riyals. Let's say a barrel of oil is worth $100, which makes it worth 375 Saudi riyals. If the dollar declines 20% against the euro, two things happen. First, the value of a barrel of oil has declined 20% to the Saudis. Second, the value of the riyal, which is fixed to the dollar, has also declined 20% against the euro. To purchase French pastries, the Saudis must now pay more than they did before the dollar declined. To avoid this, the Saudis must raise the price of oil, which they do by threatening to limit supply.

The $13 trillion U.S. debt is weighing in the back of the minds of foreign investors. That is why they may continue to gradually move out of dollar denominated investments - slowly, so they don't diminish the value of their existing holdings. The best protection for an individual investor is a well-diversified portfolio that includes foreign mutual funds. (Last updated June 3, 2010)

b)http://www.stanford.edu/~mckinnon/br...eJEPMKenen.pdf

c) http://en.wikipedia.org/wiki/United_States_dollar - Very good article
d) http://en.wikipedia.org/wiki/Money_supply