In his latest video, “Blue Magic,” off the American Gangster album, rapper and businessman Jay-Z (No.8 on The Black Economy’s Wealthiest Blacks List) is seen flashing a wad of cash. However, this time it’s not the usual $100 Ben Franklins, but euros (the official currency of France, Germany, Italy, among others)?
Many Jay-Z fans did not quite know what to make of this “money switch” and others simply did not notice him holding EUR500 notes in the video. Why would Jay-Z prefer having euros over the U.S. dollar which has been the world’s most preferred currency for decades? Is Jay-Z predicting the American Economy is headed for hard times and the U.S. dollar will further decline in value? Or is hip-hop’s ambassador just continuing to be a trend-setter and his usual financially flamboyant self?
Everything in this world has a price and although it may be hard to imagine, a country’s money is no exception. The price of one country’s currency in relation to another country’s is called its exchange rate. For example, the current exchange rate for euros to U.S. dollars is EUR1 is worth $1.44. This rate is mainly determined by supply (how much U.S. dollars are in circulation) and demand (how much foreigners are willing to trade their country’s currency for U.S. dollars). The key players in the foreign exchange market are banks, governments, multi-national corporations and individual investors/speculators. Trading some $3 trillion a day, foreign exchange is the largest financial market in the world. Although stock markets dominate news headlines, the size of the global stock market is only $51 trillion — foreign exchange generates that amount in weeks.
One of the main factors that determines the value of a country’s currency is the overall health of its economy. Although the American economy is experiencing billion dollar problems in the housing market because of lost bets on sub-prime mortgages, it will not cause our $13 trillion dollar economy to fall off into a recession — which means an economy will not create as many goods and services as it normally produces. However, as long as people don’t start losing their jobs then American consumer spending, which accounts for about 65% of our economy, or roughly $8.5 trillion, will continue to keep the economy growing despite higher gas prices and increasing housing foreclosures.
Although our economy is fine overall, since 2001 the U.S. dollar has still lost about 40% of its value versus the Euro and the Canadian Loonie and about 33% of its value versus the UK Pound. The dollar is surprisingly down 45% against the Albanian Lec.
So what is the reason for the U.S. dollar’s steady decline in value over the past six years? One reason is that interest rates in the U.S. in 2001 through 2004 averaged about 2% or lower and banks paid lower interest on U.S. dollars. According to the Federal Reserve, in 2003 an average certificate of deposit only paid 1.17% in interest. In response to those low interest rates, foreign investors decided against owning American dollars and instead made money by trading for other countries’ currencies that paid more in interest. Another reason is the U.S. Government’s continued budget deficit (or spending more money then they receive from federal taxes).
How can the government do this? They simply borrow money from Americans and the rest of the world by selling I.O.U’s, or what’s officially called Treasury securities (T-Bills, Notes & Bonds). The U.S. government has trillions in debt but still has “good credit” with the rest of the world. But after accumulating over $9 trillion in treasury debt, many foreign investors are starting to become suspect about the Federal Government’s spending habits and have stated they plan not to purchase as many U.S. dollars in the future. For example, China is the largest holder of foreign exchange reserves (a country’s assets like U.S. dollars and Treasuries) totaling over $1 trillion of which about $750 billion is in U.S. Treasuries.
Recently, China announced that they would “diversify” their foreign exchange reserves because of the dollars declining value. If they started selling their U.S. dollars, other foreign investors out of fear would also start to sell and the dollar could potentially crash because no one would want to own it. The President of Iran, Mahmoud Ahmadinejad, and Hugo Chavez, President of Venezuela, have stated that the U.S. dollar is “worthless” and have been trying to persuade OPEC (the crude oil cartel of countries) to not accept dollars for oil anymore.
So how does the falling value of the U.S. dollar directly affect you? If you plan on traveling to any of the thirteen countries in the Euro Zone (e.g. France, Germany, Italy) where euros are used, you will be paying more for goods and services. For example, in Paris a Starbucks latte will cost you about 5 euros or $7.20 ($1.44*5), whereas in the U.S. it would cost you roughly $3.00.
Gas prices in America will also go up as the dollar declines. Why? Because since crude oil (which makes up 50% of the cost of gasoline) is priced in U.S. dollars, those rich oil companies in Saudi Arabia and Dubai want more dollars to make up for the lost value of the dollars they receive from oil sales. Just imagine if you sold oil for $3000 a barrel and then used that $3000 to take a yearly vacation to Paris. Well, let’s say one year later you sold another barrel for $3000 and then found out that it’s going to cost you $4500 for the same trip to Paris because the dollar lost its value against Paris’ euro. You too would probably start charging more for your oil to make up the difference for your vacation trip.
How can you make money off foreign exchange if you live in America? You could come up with a business that sells to the countries in the Euro Zone where euros are used and then price your goods or services in euros and later convert them to U.S. dollars at the current exchange rate. This means if I sold a pair of Nike Air Force One shoes to someone in France on eBay for EUR60, I could then trade those euros for $86.35. Since euros are worth more than dollars it makes since to be paid in euros because you can trade them and receive more dollars. You could also learn how to be an investor/trader in the foreign exchange market by doing your research and practicing first with virtual money on sites like Forex.com until you feel you are good enough to try it with your own money. Err on the side of caution as you never know when the currency exchange rate may shift for or against the currency you’re trading.
Finally, Jay-Z holding that wad of euros was more than likely his usual sarcastic way of saying since he owns euros then he actually has even more money than the rest of us only having U.S. dollars!
Have a Safe & Prosperous New Year!
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