> But no one wants to hold them because they devalue and will continue to do so at an accelerating rate.
Devalue against what is the main question though, isn't it? The real longer term issue is that the USD is devaluing against the Euro, but even that has serious issues for Europe's export oriented economies [1].
The EUR/USD FX rate has been pretty stable for about 10 years. I think (sadly, didn't check notes before I wrote this), the trade balance between US and EU is well-balanced. As a result, the FX rate should also be well balanced.
> Devalue against what is the main question though, isn't it? The real longer term issue is that the USD is devaluing against the Euro...
I don't think that FOREX rates are the best way to think about this, but if you work in that world or otherwise have an intuition for it, then go ahead.
Most of us only handle 1 currency, and reasoning in terms of 2 isn't exactly an intuition pump.
Instead think about:
1. The dollar valued against itself a year earlier, and a year in the future. That is the interest rate or yield of the asset if held.
It should have a positive real yield, but right now it doesn't.
2. How much your personal basket of monthly expenses costs in terms of dollars.
Ignore a basket that someone on the news told you to care about, like CPI.
I mean your personal basket, all the stuff you personally buy, how much is it in dollars, now, a year in the future, a year earlier.
If you stored value in business or a precious metals in the last year and then converted back, you would probably have more dollars, or be able to buy more stuff, that's all there is to it.
> I don't think that FOREX rates are the best way to think about this, but if you work in that world or otherwise have an intuition for it, then go ahead. Most of us only handle 1 currency, and reasoning in terms of 2 isn't exactly an intuition pump.
Forex rates, balance of trade, and relative strengthening are great ways of understanding international fluctuations. They are exactly the way to understand reserve currency movements
> 2. How much your personal basket of monthly expenses costs in terms of dollars. Ignore a basket that someone on the news told you to care about, like CPI. I mean your personal basket, all the stuff you personally buy, how much is it in dollars, now, a year in the future, a year earlier.
This hits at a major part of the issue: goods that have no importable replacement good (housing and healthcare, namely) are a huge part of what lead to the huge bout of inflation. But those are domestic economics, not international economics.
>The dollar valued against itself a year earlier, and a year in the future. That is the interest rate or yield of the asset if held. It should go up, but right now it goes down.
It depends.
Positive real interest rates do not necessarily mean deflation, and deflation isn't necessarily a bad thing.
As an example, you could give a loan for $1 to someone for 5% interest.
In a year they pay you back, so now you have $1.05.
That dollar could get you exactly the same amount (of real goods or services that you personally want) as last year, or it could get you more, or it could get you less.
Inflation and deflation typically refer to the price of a basket of intrinsically valuable goods and services.
That is separate from the interest rate which is just what you, the creditor, and the debtor shake hands over.
If the dollar gets you the same basket as last year, then you are net better off because now you can buy the basket and you have $0.05 for lending to someone who was able to pay you back.
The missing variable here is the productivity of the rest of the economy, if the economy is growing, then you can see a decrease in dollars per basket (deflation), but that's not necessarily a bad thing.
The interest rate is sort of like a best guess for the productivity of the debtor.
> Hum... There are no reliable numbers out there, but I don't think the dollar devaluation has been keeping up with the US inflation.
There isn't anything like "dollar devaluation has been keeping up with the US inflation". You are interested in what is called the import/export price index [1] and for imports that has been relatively flat for the past ~24 months(import +.3%, export +3.8% for TTM). So in a sense, imports for a fixed good are relatively unchanged in constant-currency terms.
It's more along the lines of "if the EUR goes to 1.5, what does this do to eurozone economies?" and the answer to that isn't pretty for europe. This would greatly impair the economy of Germany and other large eurozone economies pretty substantially(see this article for why [2]).
And finally, remember: the US actually exports inflation [3]. Most economies cannot simply say no to this effect.
> If all the prices rise in the US to compensate, Europe stays exactly as competitive as before.
Yes, but my point is exactly the opposite has occurred for imports: the US is still roughly flat in terms of import inflation. Since Nov '22, import inflation has been sub-3% without exception and sub-2% since 2023 without exception. The US is still exporting inflation effectively, and US inflation is due to factors other than currency fluctuations.
That's the real issue: the USD weakened 8% against the EUR, and prices remain the same. For eurozone exporters to the US that's an absolute disaster.
Devalue against what is the main question though, isn't it? The real longer term issue is that the USD is devaluing against the Euro, but even that has serious issues for Europe's export oriented economies [1].