That's a more complicated question than it sounds on surface level. If the dollar takes a precipitous fall, the most acute pain will be felt in the prices of imported commodities.... the two thousand pound elephant in this room being the price of oil.

You'll still have the same nominal value of savings, but the prices we all pay for things would increase, and the price of gas might make your jaw drop. So, adjusting your lifestyle in a way that reduces your reliance on gas would help offset some of this impact. Of course, oil prices affect most ALL elements of our economy, so there would be increases most notably in food costs as well.

I guess my overall point is that a dollar devaluation doesn't impact all things equally. There are lifestyle and purchasing choices you can make that would help offset SOME of the pain.

And, of course, my scenario only applies to a managed devaluation. If there is some sort of "collapse" in the dollar, then all bets are off... but I don't think we're looking at a "Weimar" scenario where the inherent value of money is undermined.

Thanks for the clarification Bjonsson I wasn't sure how much it would fall but your explanation seems accurate.

Your savings are long term, so it is going to fluctuate. Like it was said earlier, you'd be better off adjusting your lifestyle.

The events of the past 2 years have been completed unprecedented in the money markets. In the last 4 months alone, we doubled the supply of currency in the United States. Generally, the economy grows and currency grows at a moderate pace. Recently, the economy is showing signs of shrinking.

Leading up to 2005, the currency supply in the US was less than $1 trillion dollars, now it is over $2 trillion. The value of the dollar has been following a pace of declining 50% over 20 years, whereas we're looking at more like over 5 years. That's around 15% inflation for 5 years. Maybe it will take 10 years of 7%. Believe what you want. Either way, commodities hold up against inflation. You could always invest in a Euro market too.

-My opinion.

It has lost about 30% of its value compared to GBP, theres more scope for it to fall as the $1trillion stimulus package deficit will clearly affect the exchange rate, looks like Obama has taken a calculated risk, I dont think it will pay off.

Not necessarily true.

Money supply, in terms of its impact on inflation, is NOT necessarily directly correlated with the sheer amount of "currency" that the government has issued. This is a MAJOR error of logic that a lot of the uneducated media is spreading.

When analyzing inflation rates, money supply is an equation with THREE coefficients... first, your "physical money" base, or actual currency in circulation... times velocity of money, and then you have the multiplicative effect of fractional reserve bank leveraging ratios.

Let me take the bank leveraging factor first.... Banks take deposits from people, and then loan out the money, pocketing the spread between the interest rate of the lendee minus the interest rate they pay the depositor. If banks kept every single dollar that you deposit to them in their vault, then they wouldn't have any money to lend, because they'd be keeping it all. So... in order for banks to work properly and make money, they literally lend out MORE cash than they have on hand. Our "fractional reserve" banking system generally allowed banks to only keep one dollar of actual "cash" on hand for every TWELVE dollars in loans they extend. The logic here is that they figure (on a simplified dollar for dollar basis) that only 1 lendee will default for every 12 loans made. If this default rate exceeds this rate, then banks can temporarily borrow cash from other banks to cover them, until their loan portfolio is right side up again.

Think about this... say you get paid from your employer, and your weekly salary is electronically deposited into your bank account. Then, you go out for dinner, and to pay for it, you swipe your debit card. Then, you buy gas, swipe your debit card again... during the course of this day, how much actual "physical cash" have you used? None. All of these transactions were done through electronic "promises" made between your bank, your employer's bank, the restaurant's bank, and the gas station's bank. Part of the crux of this crisis is that banks were floating FAR more of these "electronic promise dollars" than they had reasonable cash reserves to back them with. As I mentioned above, the reasonable bank cash reserve ratio (per Basel 2 rules) is 12 to 1. Some of our infamous megabanks were floating electronic credit in excess of 30 to 1! In effect, banks were creating "wealth" that did not have tangible assets behind it. This leveraging works great when people are paying their bills and things are rosy, but when people start massively defaulting on mortgages and loans, then this system comes crashing down. Why?... because the money that banks lent out to finance these homes is coming from the hard cash that YOU deposited!

So... when banks are forced to scale back their reserve ratios, as they are doing now, this has a DEFLATIONARY effect... and it can be a VERY significant effect, going from 30/1 back down to 12/1 implies a deflationary effect of more than halving the amount of credit that banks are willing to extend.

"Velocity of money" refers to the number of monitary transactions that people engage in with their cash. During good times, when people feel secure, velocity of money increases. People are willing to spend. But, if people suddenly become insecure and afraid, they start saving money, start pulling their money out of investments, and start hoarding cash.

So... say you have an "economy" of two people. Each person has $10, and they use the money to buy and sell goods from each other. This would imply a "money supply" of $20 (two people, each with $10). NOW, lets say these two market participants suddenly get fearful and get in the mood to hoard cash.... and each of them take $5 of their wealth, and put it in their matress. Now, you would have the same two people trying to transact the same business as before, but instead of having $10 that they are willing to spend, they only have $5. The effective "money supply" in circulation, as a result, reduces from $20 to $10... which is, in effect, deflationary.

So, I guess my net point here is that the "inflation" case is not necessarily an inevitability, at least in the short term. Some of these deflationary forces at play have the potential of reducing the circulating money supply in factors exponentially larger than the amount of the hard cash being injected into the economy by the Fed.

In the long term, however, if banks are able to re-leverage back up to pre-2007 levels, and if consumers reverse their current sentiment and velocity of money starts to increase again, there is potential for significant inflation, provided the Fed is unable to rein in these cash injections.

Sooo.... to end this monstrosity of an essay... the inflation/deflation situation is far from predictable. The Fed is attempting to walk a very fine line.

I think us dollar will lose 10%

Bjonsson, I'm somewhat familiar with what you wrote about. I am aware of the way money is created and the concepts you spoke of. However, I gave a period of 5 years. I would feel that the velocity of money would bounce back, and the leveraging may be reduced, but the effects of the money supply is what I believe we will be feeling.

To me, the current situation appears to have risen from another artificial demand crisis. If the money supply doubled with the value of the dollar remaining somewhat flat (comparing the US$ falling vs the pound does not acknowledge the pounds fall and correction), then the demand must have doubled or the economy grew by a large amount. Well, the economy didn't grow.

So in five years when we're starting to invest again, where will we be?

You can say that the currency supply is being used for fear mongering by the press, and I'll agree with you, but that doesn't mean that there isn't any merit to what they're saying. Sometimes people appeal fallaciously even when their beliefs can be substantiated through other means. The press knows that fallacies work.

Maybe banks will leverage at more moderate ratios, but I doubt that it will have a strong effect on the forces at be. Before the crash there was downward pressure, then we printed $1 trillion and the dollar didn't fall.

I stand by my argument, but am willing to admit that the effects could be lessened or drawn out a little. I'd accept a 60% fall in 10 years.

I think it will lose 99%, and it will over a long enough time horizon. Do you have a time period or reasons?

Watts... I don't disagree with your logic, especially after 5 years. But, just as the Fed is injecting massive cash liquidity now, the Fed also has mechanisms of removing that liquidity further down the road.

I'm not necessarily agreeing that this is optimal policy in terms of managing a currency, nor am I saying that I buy the Fed's line that this would work. In fact, I lean towards a higher probability of future devaluation, as the only possible way the government might ever attempt to service its debt load in the future... barring something HUGE like getting cold fusion to work.. lol

At this point I'm leaning more towards cold fusion than burning bills, haha.

Does Bernanke know something the rest of us don’t? As the Stock Research Portal points out, “Common sense dictates that no person or country can succeed in the long term by attempting to create wealth out of thin air.”

Bernanke is not creating wealth out of thin air.

I don't necessarily agree with Bernanke's policies on this, but I understand the premise.

What Bernanke is doing is recapitalizing the finance system. I'll give a very simplistic example to describe the basic practice: Say you have a bank that had $100 in the vault, and was lending out at a 20 to 1 ratio. In effect, this bank has extended $2000 worth of credit.

Now, lets say that the bank gets scared and decides to reduce its lending to a 10 to 1 ratio. To do this, the bank withdraws open lines of credit, slows new loan approvals, etc.. until the total outstanding value of the loans is cut to $1000.

What Bernanke is attempting to do is to loan the bank $100. This $100 loan would be added to the $100 that the bank already has in its vault, and would allow the bank to, on a conservative 10 to 1 lending ratio, extend $2000 worth of credit. So.... the bank's bias towards conservatism is protected, AND the net amount of credit in circulation remains at the $2000 level as it was before the crisis began.

When the fear subsides and the economy rebounds, the banks would (hypothetically) be willing once again to extend their lending ratios back to 20 to 1. At this point, Ben could call in his $100 loan, and net credit extended once again remains at $2000.

The logic has two major difficulties. The most obvious being the last step, withdrawing the loans. If the Fed doesn't pull back the cash injections quickly enough, you get inflation. This is, in effect, what Greenspan did wrong.. and continued to do wrong, for YEARS and actually contributed to the problem we face today.

The other difficulty is more systemic. Banks may not want to return to past levels of lending ratios anytime in the forseeable future. Part of this is driven by the fact that banks are unable to "securitize" debt like they used to, and sell it off to other players.