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Hi. Thanks for tuning in to 21st Century Income. Today I’d like to speak about the falling dollar and the possible coming re-valuation of the Chinese currency called the yuan. Let’s talk about those as they relate to generating income. If you are at retirement age and you have built up a sum of money and you are now going to try and turn that money into income, how does that affect you?

We have the dollar falling in international markets. It’s falling in international markets because of many complex reasons, but at least the closest cause is a lot of what’s going on with sub-prime mortgages and financial issues in the US. That had caused the Federal Reserve to make its first interest rate cut last month. The consensus is that the Federal Reserve will have to continue to cut rates to assist the economy in healing all the various mortgage issues. That, of course, does not bode well for the value of the dollar internationally and that’s why the dollar’s falling.

How does that affect savers?

Now, when the Federal Reserve cuts rates, it affects the most—let’s talk about income, if, again, you are at retirement age or in retirement and you’re generating income when the Fed cuts rates. Most people are savers and most savers live on what’s called the short end of the yield curve. For us that means money markets, CDs, checking accounts, things like that, bonds. Those instruments are most affected when the Federal Reserve cuts rates. The effect of that is when you go forward you will earn less interest income.

Falling dollar leads to higher inflation

The falling dollar, also, in international markets has other implication, one of which is that China, whom we import a large amount of goods from, may be revaluing their currency upwards to the United States. That means, of course, that those imported goods will now become more expensive. You can see imported goods becoming more expensive in things like oil, whose price has gone up simply because we import so much oil. As the dollar goes down, the people who export the oil have to be paid more just so they can be paid the same.

You have these twin jaws: lower interest income, higher inflation. It is effectively a war on savers—again, savers being people who live on savings accounts, CDs, checking accounts, short term bonds. In the 21st century, or in terms of generating 21st century income—what it’s going to be about is, how do you profit from these? How do you make profit from these changes? These are major structural changes that are going on both inside and outside the United States. Our job, as people who generate income in the 21st century, is to make a profit from that.

How do you manage your money in light of the falling dollar?

Generating this income, I think, in the future is going to be less about how much you have and more about how you actually manage it. In the old days you could have a certain amount of money. You used to be able to go the bank and, maybe, make eight or nine percent on that money—there was a time, even ten percent—and not take any risk. So now, of course, that’s not the case. You can’t make that. You can only make, maybe, three or four percent and this is going down, while inflation is going up, which means the amount of goods and services that money buys is getting less, becoming less.

The challenge is going to be to take those old rules, things like rules about risk, rules about time horizons, and rules about how you properly manage an account or how you manage your money for income, and to disregard them. Those rules don’t apply anymore. In fact, they are dangerous if followed. It is kind of like how there was a time when people thought the earth was flat. Well, now we know that it’s not flat. What I’m saying is that in the 21st century, how you manage the money you have for income and how you generate the income will be more important than exactly how much you have. Thank you for tuning in.