The value of the U.S. dollar has been in steady decline. It doesn’t help that the cost of living has continued to rise or that the effects of inflation have seeped into so many other aspects of everyday life.
Changes in the value of the dollar have, understandably, caused many people a lot of financial stress. Today, the question isn’t just what the value of the buck is going to be in the next 10 years or so. It’s also: What can people do to keep up with these changes?
Here’s a brief overview of how — and why — the dollar has changed in value over the past 10 years, and what people can do to keep up with it, according to experts.
The Dollar and the End of the Gold Standard
Thanks to inflation, the value of the dollar has shrunk over the past decade. If you were to purchase something for a dollar back in 2013, you’d need $1.32 now to be able to get the same item. That’s a 32.1% increase — and a clear sign that even 10 years is enough to impact the value of this currency.
But why has the value of the buck diminished so much?
While there are many possible reasons for this change, one is the end of the gold standard in the U.S.
“Once the U.S. dollar uncoupled from the gold standard, it transformed from a currency backed by precious metal to a promissory note,” said Josh Krafchick, founder of 369 Financial. “This seemingly innocuous shift has had far-reaching consequences, transforming the U.S. dollar into a form of debt that constantly fluctuates in value due to interest rates and inflation.”
Inflation’s Impact on the Dollar
Of course, the impact of inflation on the value of the dollar cannot be overlooked. With rising inflation comes reduced purchasing power.
Warren Buffett once wrote in a letter to his shareholders that inflation is man-made and so it could be man-mastered.
“This astute observation encapsulates the essence of the modern U.S. monetary system,” said Krafchick. “Inflation, a consequence of increasing the money supply, is indeed a result of human actions. As more money flows into the system, inflation inevitably follows. This principle was particularly evident during the recent [COVID-19] pandemic, when an unprecedented amount of money was injected into the economy, leading to a ripple effect of rising inflation.”
Fiat Currencies Diminish Eventually
Over time, the value of any fiat currency — including the U.S. dollar — is bound to diminish, according to Stéphane Bottine, founder of the TrustedBrokers comparison service.
“In the last 10 years, the dollar has lost 49% of its purchasing power, as measured in gold. Gold is a useful barometer against which to measure the purchasing power of fiat currencies, because its purchasing power is constant over long periods of time,” said Bottine.
“Unlike physical commodities like gold or silver, fiat currencies are printed into existence by governments and central banks,” continued Bottine. “With government debt rising at an alarming pace in the United States, the path of least resistance for the dollar’s purchasing power over time is downward.”
Other Underlying Factors in Changes to the Dollar
Many other underlying economic factors could be bringing about the depreciation of the dollar.
These could include “investors adjusting their portfolios because they see an excess of dollars, a persistent sizeable U.S. current account deficit, a shift in China’s trade policy aimed at reducing its surplus, and interest rate disparities that render dollar holdings less appealing,” said Thomas Franklin, finance expert and fintech CEO at BitInvestor ApS.
Looking Ahead: The Value of the Dollar
Although many economists and financial experts firmly believe that the dollar has diminished in value and will continue to do so, there’s always a chance that things will turn around.
Artem Minaev, senior investment advisor and co-founder of CryptoDose, suggested that the dollar might even rise again — if one goes by the Dollar Smile Theory.
“This theory suggests that the dollar’s value follows a U-shaped pattern over time. In the early 2010s, after the global financial crisis, we witnessed a weaker dollar as the Federal Reserve implemented measures to boost the economy,” said Minaev. “More recently, as the Fed adopted a tighter monetary policy, the dollar has strengthened. Looking ahead, I’m inclined to think about how global economic dynamics could impact this smile.”
Nathan Jacobs, senior researcher at The Money Mongers, added, “The value of the dollar’s got a bunch of balls in the air, from what the government’s doing with its spending to how the world’s economy decides to play out. If things keep rolling as they have, our dollars might continue to slim down when it comes to buying power. But hey, economies can surprise us, and a few smart moves could beef it up again.”
When looking at the value of the buck from 10 years ago to a decade in the future, it’s also important to remember that there’s a difference between real and nominal returns.
“Nominal returns represent the growth in the dollar’s face value, while real returns factor in the impact of inflation,” said Skyler Fernandes, economist and founder at Finally Fund Admin. “To accurately gauge the dollar’s purchasing power, individuals should focus on real returns, as this accounts for the erosion of the dollar’s value over time.”
Ways To Combat the Dollar’s Diminishing Value
While only time will truly tell how much the dollar is worth in 10 years or beyond, it’s still important to protect your finances now and in the future. Here are just a few ways you can do that.
Invest in Precious Metals
According to the government’s COLA — Cost of Living Adjustment — estimates, the dollar has lost 35% of its purchasing in the past decade alone. One way to combat this is to invest in assets that have historically outpaced inflation.
“One of the ways to deal with the effects of the declining purchasing power of the dollar is by investing in assets that beat the rate of inflation,” said William A. Stack, financial advisor and author at Stack Financial Services LLC. “The performance of gold and silver over time has outpaced official COLA numbers.”
Another option is to invest in the S&P 500 Index. It “can also help consumers beat inflation, having risen over 9% per year over the last decade,” said Stack. “Consumers can participate by purchasing gold, silver or the major stock market index funds.”
Invest in Foreign Markets
Bottine suggested investing in foreign markets as a way to protect your dollar’s purchasing power.
“The value of your investments in U.S. dollars will appreciate when the dollar weakens,” he said. “Countries like Mexico, India and Vietnam are growing rapidly as companies diversify their supply chains away from China.”
Turn to Higher-Paying Jobs
In addition to investing wisely, it’s also prudent to look for jobs that simply pay more.
“To protect their wealth from inflation, individuals face two primary strategies,” said Krafchick. “First, they can seek employment in positions where their income rises at a rate higher than inflation, allowing them to maintain their standard of living.”
“Second, and perhaps more importantly, they can invest their money wisely,” continued Krafchick. “Investing in well-established companies with the potential for growth exceeding inflation can be an effective hedge against the declining value of currency. Ideally, you want to do both.”
Diversify With Alternative Investments
Alternative investments are often seen as a high-risk, high-reward asset class. But if you’re trying to keep up with the diminishing value of the dollar, it might be worth investing in a few.
“In addition to traditional investment options, individuals can explore alternative investments, like cryptocurrency or investing in startups,” said Fernandes. “While these carry unique risks, they can serve as hedges against dollar devaluation and provide opportunities for diversification. Staying informed about evolving investment landscapes is vital for adapting to changing economic conditions.”
Reduce Your Debts
Paying off your existing debts could help you combat the potential drop in your purchasing power.
“The real value of money diminishes due to higher inflation, so you need to pay off existing debts while minimizing taking new ones,” said Franklin. “This is because the real value of your debt will decrease over time, which sounds good but actually can be problematic. If your debt carries a floating interest rate, the rates could go up, making it more expensive for you to repay.”
Franklin suggested renegotiating your debts to lower fixed interest rates. At the same time, try to pay down your debts as quickly as possible so that you’re better prepared financially.
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