Beware when headlines proclaim a new record for some economic indicator. A quick example explains why.
My weight hit a record in November 1968. An Army physical put it at 179 pounds. The previous March it was only 144 pounds. I had ballooned 35 pounds, a shocking 24 percent, in eight months. I must have been pigging out.
Actually, that’s exactly what I was doing. I had not exercised at all during a 24-week Portuguese language course. But after eating great chow in an Air Force mess hall for six months, I never had weighed so much in my life.
My entire life, however, was only 18 years and three months at that point. Moreover, when I entered the Army at 17, I weighed 175 pounds. I thus had gained a total of four pounds in 14 months from starting basic training to finishing language school.
The 144-pound mark came after eight weeks of basic, nine weeks of infantry training and four weeks of paratroop school. At the end of jump school, we were all lean, mean, teenage running machines. The pounds started to come back, however, once the rigorous training ended.
Despite the dramatic loss and gain that first year, when I left active duty in September 1970, I was just two pounds heavier than when I had entered three years earlier. I was also two inches taller.
Keep this story in mind when headlines shout that the euro is setting record highs against the dollar. Yes, the dollar price of a euro has increased by 44 cents since October 2000, and by 14 cents just since July 17. Looking at it the other way, the value of a dollar declined by 35 percent and 12 percent over these two periods. Hence, some pundits are yelling, “Man the lifeboats, our money isn’t worth anything, the U.S. economy is going down!”
They are wrong. Comparing Jan. 5, 2004, to Jan. 4, 2000, when the euro first traded, the dollar price of a euro has increased 8 cents, or 6 percent. The dollar has weakened only modestly from levels markets determined during the boom and before the 9/11 attacks spread insecurity. There is no cause for panic.
A comparative look at dollar and deutschmark rates is instructive. In the past 25 years, it took from as little as 30 cents to buy a mark to as much as 72 cents. The average over 25 years was 53 cents. The dollar fell 65 percent in value against the mark from a high in early 1985 to a low in 1995. Conditions changed rapidly, however, and the mark in turn fell 40 percent from 1995 to 2000.
The violent dollar/deutschmark fluctuations over the past quarter century did not destroy either the U.S. or German economy. Currency prices fluctuate. Economies adjust. Don’t waste sleep because of the dollar’s recent modest drop.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.