When I lived in Chicago, I attended one of the oldest, most famous Yeshivot in the United States.  Its history went back to the early 1900s and it alumni numbered in the tens of thousands.   And yet, this Yeshiva, with all its history and support, never seemed to be able to raise enough money to keep its head high above water.  On the other hand, the Yeshiva was never bankrupt, and always kept on living with just enough money to live, but not enough to thrive.  An alumnus of the Yeshiva once told me “the alumni of the Yeshiva will not donate enough to make it thrive, but they will never let it fail.”

The United States faces a similar predicament in connection to the other major nations of the world.  On one hand, the United States is just not making enough to sustain its lifestyle, plain and simple.  On the other hand, the United States is the biggest market and no one wants to loose their best customer.

The United States generally tries to grow its economy using a two pronged strategy – debt and inflation.  The United States borrows money to invest in its own economy and grow its sectors.  But this will hurt the economy by causing inflation

How does debt weaken the economy?  Let me offer the following analogy.  Suppose there is a pizza, which is divided in half.  I, as a private owner, own the right to two slices.  Now each slice is the size of half of the pizza.  So, when I promise to give my own family, two slices, I am promising a full pizza.  Now suppose the original owner of the pizza promised someone else two slices as well.  How can he pay us both?  He will cut the pizza into four slices and give us each two.  So I still get two slices only now they are much smaller.

When the government goes into debt, it promises another nation money.  No one is going to take it from us, but we will pay for it via inflation (when our slices become smaller.)  We suddenly loose our buying power (our currency weakens).  The solution is then not to pay the other nation back, but to compile the loan and go into further debt.

But there is a good side to debt as well; when the US is indebted to other nations, then the United States becomes one of the other nations’ chief concerns.  The nations will not let the US fail because they do not want to loose their investment.

So the other nations try to make sure the United States will “live it out.”  They print more of their own currencies (cut their pizza into littler pieces) so that the rate of our currency (slices) to their currency (slices) remains the same.

The long and short of this is that the ratio of our currency to that of other countries is fluctuating, not based on how the market demands it should go, but based on what new economic policy will be adopted, which has a lot more to do with lobbying and much less to do with the actual needs of the economy.  The clashing of these two issues is what has caused an unstable dollar over the past few years.

This is only part of what makes playing with currencies so dangerous, and advertisements, like this one, amazingly deceiving: (I took this ad from a ynet article – no shock there).

When I am asked what I should do with my money, leave it in dollars or turn it into shekels, I have to answer that I do not know.  I don’t have any insider knowledge into what the US will do next, how the EU will respond and the impact on Israel’s imports and exports.  I don’t know if the economic policies mixed with the actual economic reality will work for the favor of either side currency because I lack too much information of what is going on behind closed doors.

So I ignore it.  My money is diversified between dollars and shekels: when I need an in Israel I use shekels, and when I buy stuff in America I use dollars.  I may not be making any additional money, but I minimize my losses and my worries as well.

PS – See this post for more about the dangers of playing the Forex market