The USA dollar seems lousy to me. Huge debt (both government and consumer). Government debt is huge on the books and huge off the books (state and local retirement – and federal medical care [social security is really in much better shape than people think, though it also has issues 30 + years out}).

The Euro seemed a bit lame 3 years ago. Today it seems crazy to think at least one Euro country won’t default in the next 3 years – and likely more. And if they take steps to avoid that it seems like it is going to make the case for the Euro worse).

The Japanese Yen is much stronger than makes any sense to me. I think it is mainly because of how lousy all the options are. The huge government debt (worse than almost anywhere) and lousy demographics (and the refusal to deal with demographics with immigration or something) are big problems. The biggest reason for strength is that the individuals have huge savings (when your citizens own the debt it is much less horrible than when others do – especially when you are looking at currency value).

The Chinese Yuan is the best looking at the economic data. The problem is economic data is questionable for the best cases (looking at the USA, Japan…). China’s economic data is far from transparent. There is also great political and social risk. The current worries of a real estate bubble seems justified to me and China just this week took exactly the wrong action – trying to prop up the bubble (in order to decrease the economic slowdown). I can see either of these cases playing out 10 years from now: It was obvious the Yuan was the strongest currency you are an idiot for not being able to see that or It was obvious China was a bubble with unsustainable policies and likely social upheaval thinking that was anything but a sign to sell the Yuan was foolish.

Given all this I think I weakly come down on the side that the Yuan is likely to be the strongest.

The safest play I think is the US dollar (as lousy as it is on an absolute basis the options make it look almost good). It could get clobbered. But that seems less likely than the others getting clobbered.

Smaller currencies have some promise but they can be swamped by global moves. I really have no idea about the Brazilian Real. That might actually be a really good option. The Australian Dollar and Canadian Dollar may also. But those economies are really small. I don’t trust India: they have many good macro-economic factors but the climate for business leaves far too much to be desired (as does the pace of progress fixing those weaknesses). Many economist like them due to demographic factors. I understand that demographic factors will help, but without systemic reform I question how well India can do (it certainly has the potential to do amazingly well, but they seem to be significantly farther away from reaching their potential compared to many countries).

The Singapore Dollar seems good on many levels, but the economy is small. I am not really sure about emerging economies, there currencies can get swamped in a hurry. Thailand and Indonesia experienced this recently. Thailand, Indonesia and Malaysia are interesting to me in thinking about what their currencies may experience, I would like to read more on this.

This is more an intellectual and curiosity exercise than something I see directly tied to my investing strategy. But having clear answers of what I thought reasonable scenarios were for currencies going forward that would factor into my investing decisions. Right now, the confusing this causes me, leads me to favor companies that should be fine whatever happens: Apple, Google, Toyota, Intel (I don’t really like Facebook overall but in this way they fit). Lots of the stocks in my 12 stocks for 10 years portfolio, you might notice.

Related: Is the Euro Going to Survive in the Long Run? – Why the Dollar is Falling – Strong Singapore Dollar – Warren Buffett Cautions Against Buying Long Term USD Bonds

The World Bank Development Prospects Group shows food price changes Q1 2010 to Q1 2011

If food is 10% of your expenses and food overall has inflation of 30% that only increases your expenses 3%. If food is 50% of your income and goes up 30% that increases your expenses 15%. In the USA people spend about 10% disposable income on food (much of that though is really processing the food not the raw material). Spending in Japan on food is 19%, France 16%, China 33% and India 46%. 50% if what most of the people in the world spend. Those people are poor and don’t have the resources to pay more. This is why food prices are so critical. Governments fall from such rises in basic food prices. Also remember even in a country like the USA, where the average is 10% nearly 30% of people spend over 20% of disposable income on food. There are large variances not only between countries but within countries.

What matter most is local food prices, but global food prices impact the prices in countries. Though many governments subsidize food prices – when food costs more than 30% of people’s income I think not doing so (when prices rise dramatically) would be crazy. When food costs 5% the government really doesn’t need to be involved.

Inflation is a serious threat to economies in the next few years. Food inflation for non-rich countries is a huge problem now.

Related: Food and Energy Costs July 2008 – Food Price Inflation is Quite High – You Can Help Reduce Extreme Poverty – Creating a World Without Poverty – Ethanol: Science Based Solution or Special Interest Welfare

Food Price Watch by the World Bank

Buffett Says Avoid Long-Term Bonds Tied to Eroding Dollar, quoting Warren Buffett:

By “take away” he mean the government can undertake policies to “inflate” their way out of a budget mess. By undertaking policies that create inflation (drastically increasing the money supply, borrowing huge amounts of money, running huge trade deficits…) the country can devalue the currency, the US dollar in this case, and thus reduce the effective cost of the payments they have to make on long term bonds (because they pay back the loans with devalued, inflated, dollars). I believe he is right and long term USD bonds are a very risky (inflation risk) investing option today. Of course I have felt the same way for the last 5 years. I own very little in the way of bonds – I do own a bit of TIPS (Treasury Inflation-Protected Securities), in my 401(k) – but stopped allocating money to that class in the last year.

Related: Bill Gross Warns Bond Investors (March 2010) – Bond Yields Stay Very Low, Treasury Yields Drop Even More – Who Will Buy All the USA’s Debt?

Don’t be fooled by apologist for those causing the credit crisis that try and excuse their behavior and act as those paying back the bailout payments means they paid back the favors they were given. They have received much more from the policies of the federal reserve that has taken hundreds of billions of dollars from savers and given it to bankers. It has the same effect as a direct tax on savers being paid to bankers.

What is an investor/saver to do? James Jubak provides some excellent advice.

How to maximize what your cash pays even when nothing is paying much of anything now

Whether you agree with his suggestions in the article is up to you. But even if you don’t he provides a very good overview of the options and risks that you have to navigate now as an investor seeking investments that provide a decent yield. I agree with him that interest rates seem likely to rise, making bonds an investment I largely avoid now myself.

Related: posts on financial literacy – Jubak Picks 10 Stocks for Income Investors – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 – Bond Yields Show Dramatic Increase in Investor Confidence

Real GDP decreased 2.4% in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4% in 2008. The price index for gross domestic purchases increased 0.1% in 2009, compared with an increase of 3.2% in 2008.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision. The “second” estimate for the fourth quarter, based on more complete data, will be released on
February 26, 2010.

Related: China GDP up 8.7% in 2009 – 2nd Quarter 2009 USA GDP down 1% – Japanese Economy Grew at 3.7% Annual Rate in 2nd Quarter 2009

The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.

The change in real private inventories added 3.39 percentage points to the fourth-quarter change in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second. Real final sales of domestic product — GDP less change in private inventories — increased 2.2% in the fourth quarter, compared with an increase of 1.5% in the third.

Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 5.1% in the fourth quarter, compared with an increase of 3.0% in the third.

Current-dollar personal income increased $119.2 billion (4.0%) in the fourth quarter,
compared with an increase of $35.1 billion (1.2%) in the third. Disposable personal income increased $130.8 billion (4.8%) in the fourth quarter, compared with an increase of $31.6 billion (1.2%) in the third. Real disposable personal income
increased 2.1%, in contrast to a decrease of 1.4%.

Personal saving — disposable personal income less personal outlays — was $516.9 billion in the fourth quarter, compared with $495.0 billion in the third. The personal saving rate — saving as a percentage of disposable personal income — was 4.6% in
the fourth quarter, compared with 4.5% in the third.

Current-dollar GDP — the market value of the nation’s output of goods and services — increased 6.4%, or $221.3 billion, in the fourth quarter to a level of $14,463.4 billion. In the third quarter, current-dollar GDP increased 2.6%, or $90.9 billion.

Related: How Much Will I Need to Save for Retirement? – 401(k)s are a Great Way to Save for Retirement – Retirement Savings Survey Results

U.S. rental market set to slow down amid housing glut

So for renters nationwide this is one possible silver lining to the current economic crisis. Granted not a large one but in these times any good news is worth appreciating. For real estate investors the news is not as good. The Washington DC market is forecast to go against the trend for reduced rents in 2009.

According to Marus and Millichap, Metrowide vacancy is expected to rise 60 basis points this year to 6.5 percent. Asking rents are projected to advance 3.1 percent to $1,410 per month in 2009, while effective rents increase 2.8 percent to $1,351 per month. Rent growth will lag slightly in Suburban Maryland. Of the 43 rental market they track they project San Francisco to see the largest increases in rent in 2009, followed by San Diego and Washington DC.

Related: Home Values and Rental Rates – Rent Controls are Unwise – posts on housing – How Walkable is Your Prospective Neighborhood

Inflation can cause serious damage to your personal finances. As prices increase if you don’t get a raise (or your investments don’t raise) to match the increased costs you must pay your financial situation deteriorates. One benefit, to those with 30 year fixed rate mortgages, is that you get to pay back your loan with inflated dollars. This can be a huge advantage for some, and a huge loss for whoever holds the mortgage.

Related: inflation risk for investments – Inflation is a Real Threat – Food Price Inflation is Quite High – posts on inflation

The continued increase of inflation is a serious problem. Eventually the federal reserve needs to take serious action (raising the discount rate). And the politicians need to stop raising taxes on the future to spend more and more every year. Their continued financial irresponsibility is a large part of the reason for the declining value of the dollar – along with the voters that keep electing those proposing large increases in spending while pushing off paying for that spending to future tax increases.

Related: inflation investment risk – Food Price Inflation is Quite High – Bernanke warns of inflation – Politicians Again Raising Taxes On Your Children – USA Federal Debt Now $516,348 Per Household

U.S. producer prices rise 1.8% in June

The data is from the IMF. As with any economic data there are issues to consider about comparing across countries. Still this is a stark illustration that the impacts those in the wealthy countries feel from rising energy and food prices are felt to a greater degree in poor countries (that already have economic difficulties).

Related: Food Price Inflation is Quite High – Helping Capitalism Make the World Better