Talking Economics - Dollar Parity

by K. Russell Carlsson, Rogue Economist

[WARNING: Long and math-heavy. May cause drowsiness or dizziness. Read with care. Do not operate heavy machinery or evil-level Sudoku whle reading this article.]

All right, folks. I admit it. This one is just for me and my Econ homeys - your typical person on the street could give a rat's ass about foreign exchange rates. Thus, I'll amp up the terror and panic level of this post early so you'll actually read it. Wrap your mind around this:

The Canadian Dollar Is Now Worth More Than The American Dollar!

About five weeks ago, the US Dollar's years-long plummet finally drove the Greenback down to match the market value of the Loonie. I knew it was inevitable, but at that point, I was almost positive that psychological barrier would snap the American markets into action and put forth efforts to defend the honor of what was once the most powerful currency in the world. Alas, foreign exchange markets (ForEx) trade only in reality and truth, unlike equity markets with their as-yet unquantifiable Fairy Dust and Rainbows / Panic and Pants-shitting Fear Factor (I'm working on that, though... trust me. There's a Nobel waiting for me once I figure that baby out - so long as I give it a professional-sounding acronym.)

Thus the Greenback kept diving. At the end of trading yesterday, one US Dollar could purchase only 96.17 Canadian (CDN) cents. Seven years ago a buck bought $1.62 CDN. I know the only time most Americans only give half a shit about ForEx is during summer vacation season - but with today's nearly-perfected global marketplace, ForEx impacts your daily life in ways you probably haven't considered, such as food, clothing, and oil and gas prices.

FOOD:
Obviously, a weaker dollar will make frou-frou Eurogrub like Belgian truffles and that runny gym-sock-smelling French cheese more expensive - but that is miniscule sliver of the food market... and anybody who eats that crap deserves to pay an assload for it. Where the real impact lies is in the export market. Since American food products are now so much cheaper overseas, countries whose currencies have risen dramatically against the Greenback like the European Common Market, Canada, Switzerland and Australia (yes - fucking AUSTRALIA!) can buy more of our food supply. That's great for farmers, but all the rest of us get from the deal is higher food prices since domestic supply is reduced by the foreign demand.

CLOTHING:
On the whole, this one isn't so bad, because most of our clothing is manufactured in China, and China is utilizing special currency devaluing tricks to keep their Yuan's value from rising too strongly against the Greenback. However, the only comfortable office shoes I've ever found for those 10.5 EEEE boat docks dangling off my ankles are made in Italy. Five years ago, a pair cost $75. Two years ago, they cost $90. Last month, I paid $106 for them. If this dollar nosedive keeps going (and my weasel-dicked agent keeps making me work for damned-near free), I'll be barefoot come 2010.

OIL:
This is the big one. Brace yourselves for an onslaught of numbers and formulas and math and stuff: I hate to have to do it to you, but I must remain an economist first and your irritable-yet-good-hearted bar buddy second or I sell no articles at all.

The best way to illustrate the plunging dollar's effect on the US oil market is to take market prices for both oil and ForEx from two dates exactly seven years apart from each other. October 26, 2000 saw the US Dollar trade at its strongest level ever against the Euro: one Euro bought only 82.52 US cents. At the same time, oil, which is denominated and traded exclusively in US Dollars, traded for $30 a barrel. October 26, 2007 was conveniently enough the last full trading day before this article. On that day, a Euro could buy 143.89 US cents and a barrel of oil cost $91.86.

Calculating the rise in oil prices for Americans is pretty easy - take today's price and divide it by 2000's price, thus $91.86/$30, which yields a figure of 3.062. Therefore the price of oil has gone up by 206.2% in the last seven years, or an annual clip of 17.4% (trust my math on this one, unless you're particularly jazzed about computing the seventh root of 3.062) which is roughly five times the rate of wage increases in the US.

Calculating the rise in oil prices for Europeans may just make your eyes glaze over, but that's why you let me do the heavy lifting here. Just read along - or fake it just to make me feel good -nod and smile until I get to the easier-to-understand final figures. Here goes - bite down: A barrel of oil today costs 63.840 Euros ($91.86 divided by today's 1.4389 exchange rate), and a barrel of oil in 2000 cost 36.355 Euros ($30 divided by the old exchange rate of 0.8252). Therefore, the relative rise in the cost of oil to Europeans (63.840E / 36.355 E = 1.756) is only 75.6% over the last seven years, an annual rate of 8.4%, or only twice the rate of European wage increases in the same period.

Europeans notice the impact of the oil price increases, but since the increase takes a smaller share of their paychecks, they can more easily shrug it off as they ride their bicycles to work between soccer matches. Americans, however, take it much harder in the wallet as we make our 25-mile commutes to work in our SUVs between NASCAR races, thus Bubby Joe has much less truly disposable income in 2007 than he did in 2000 when compared to Jean-Luc.

That's right, Bubby Joe - Jean-Luc is eating your steak and living better than you even though he does the same job you do! I bet that pisses you off real good, don't it Bubby Joe! What're you gonna do about it? Unfortunately, not a goddamned thing, since you get paid in Dollars, Jean-Luc gets paid in Euros, and the global market has more faith in the long-term strength of the European economy than ours right now.

The US Dollar, thus, is much like Britney Spears. In 2000, every healthy red-blooded country would pay any price to get their hands on her - but today, most right-thinking folks wouldn't shag her confused and devalued skank-ass with a rented dick. More markets are working up a horny slobbering drool over our northern neighbor Avril Lavigne than our own Britney these days - I don't think I need to tell you how unsettling that should be.