The history of the US dollar traces back to the Coinage Act of 1792, which established the dollar as the standard unit of currency in the United States. This act also led to the creation of the United States Mint, responsible for producing circulating coins.
Initially, the dollar was defined based on a bimetallic standard, meaning it was backed by a fixed amount of silver or gold. However, in 1900, the US officially adopted the gold standard, which lasted until 1971 when President Richard Nixon severed the ties between the dollar and gold.
Over time, the design and issuance of the dollar have undergone significant changes. For instance, during the American Revolutionary War, the Continental Congress issued paper currency known as Continental currency. Unfortunately, due to inflation, this currency rapidly depreciated in value.
The establishment of the Federal Reserve System in 1913 marked a significant shift, with the dollar primarily being issued in the form of Federal Reserve notes. Following World War II, the dollar further solidified its global importance and became the world’s primary reserve currency through the Bretton Woods Agreement of 1944.
Today, the US dollar serves not just as the nation’s legal tender but also as the dominant currency in international trade and finance. The basic economic principle suggests that the growth of our money supply should closely correlate with our economic growth, namely Gross Domestic Product (GDP). However, the Federal Reserve can flexibly increase the money supply far beyond economic growth, leading to inflation and the depreciation of the dollar’s purchasing power.
For example, during times of war to fund military efforts, both money supply and national debt significantly increased. The economic disasters of the 2008-2009 financial crisis and the subsequent 2020 pandemic have pushed our national debt levels to those seen during wartime.
When money flows into cash-strapped bank accounts, monetary and fiscal generosity may seem cost-free, but the price comes in a dual form: inflation and debt. To curb inflation, the Federal Reserve raises interest rates to cool the economy, but this also means increased costs for repaying debts in terms of housing, auto, loan, and credit card interest rates. An excess money supply results in decreased purchasing power, meaning over time, the dollar can buy fewer goods and services.
Within the federal government, seemingly no one is adept at the task of increasing revenue and reducing spending, suggesting little change in the situation can be anticipated. As the purchasing power of the dollar continues to decline in the long run, which investments hold value? For investors, a weakening dollar can create significant investment opportunities.
– Multinational Corporations: Look for large US companies operating globally, typically with a significant portion of their revenue coming from international markets. Examples include Apple, Coca-Cola, and Johnson & Johnson.
– Exchange-Traded Funds (ETFs) and Mutual Funds: These funds allow diversification across US companies with substantial international sales. Some ETFs and mutual funds focus on multinational corporations.
– American Depositary Receipts (ADRs): While ADRs are commonly used to invest in foreign companies, some ADRs represent stocks of US companies with extensive international operations.
– Research and Analysis: Utilize financial news, company reports, and investment analysis tools to identify robust US companies with strong international sales. Websites like Investopedia and Morningstar offer valuable insights.
– Diversified Investment in Commodities: Investing in diverse commodities such as metals, energy, and agricultural products can naturally hedge against inflation. As the prices of these commodities rise, they can help offset the impact of inflation on your investment portfolio.
– Gold: Gold is often viewed as a safe-haven asset, serving as a hedge against inflation and geopolitical instability. It tends to retain its value over time, making it a good store of wealth.
– Commodity ETFs and Stocks: You can invest in commodity ETFs or stocks of companies involved in commodity production. These investments provide exposure to commodity price movements without directly investing in physical commodities.
– Energy Commodities: Investing in energy commodities such as oil and natural gas has its benefits. During inflationary periods, the prices of these commodities tend to rise, helping protect your purchasing power.
– Agricultural Products: Products like wheat, corn, and soybeans can also serve as hedging tools. Investing in these commodities can buffer the impact of inflation as food prices rise.
Diversifying your portfolio across assets of different countries can lower risks. The economic cycles of emerging markets often differ from developed markets, aiding in portfolio diversification.
Real estate investment can offer stable income and appreciation over time, thus resisting inflation.
Inflation-protected bonds of the US or similar bonds of other nations, adjusting their principal value based on inflation, provide direct hedging.
Certain industries, like essential goods and utilities, perform well during inflationary periods, with companies in these sectors typically able to pass on increased costs to consumers.
Holding currencies of countries with lower inflation rates aids in preserving purchasing power.
Seeking investments with returns higher than inflation, such as certain stocks, bonds, or mutual funds.
The impact of the US dollar’s purchasing power affects investors as it influences nearly all aspects of the economy. When the purchasing power of the dollar declines, it alters consumer shopping decisions, employers’ hiring practices, companies’ strategic decisions, and the Federal Reserve’s monetary policies. Each of the aforementioned strategies carries its own risks and benefits, thus necessitating consideration of your specific financial situation and goals. Financial advisors can offer personalized advice.