As you guys know, I’m a trader. I eat, sleep and breathe the $5 trillion forex spot market on any given day.

But that’s just my day job.

The other half of my life is spent at home. I live in Texas. I’m married, I have four kids and I’m paid in U.S. dollars like 300 million or so other Americans.

That means my wife and I have to pay for our groceries, gas, kids’ school supplies, DVD rentals, etc. with dollars just like everyone else here in the U.S.

So like you, I have a vested interest when the U.S. dollar buys me less. In economics terms, that’s known as purchasing power.

Now as a trader, I can tell you the dollar has lost against nearly all major currencies in the Forex market over the last 10 years. (See the sidebar below for more.)

But I’d like to step outside of the FX world for just a moment and discuss just how the dollar has sunk outside of the realm of currency trading, for all of you, who like me have to pay for your items with dollars…

1998 Dollars and 2009 Dollars Are NOT the Same Thing

Just to show you how weak the dollar is these days for consumers, let’s look at how many “extra dollars” it now takes to buy things nowadays.

To illustrate this, let’s review the common goods you would have purchased roughly 10 years ago (1998 actually).

Back in 1998…

An average house cost $129,000. Now it’s $180,000 (40% increase)…and that’s after the real estate market crashed.

A gallon of gas was $1.15 and now it’s over double that (actually 143% higher) at $2.80!

A loaf of bread was $1.26 and now it’s $2.39 (90% higher).

A dozen eggs cost 88 cents, now $1.49 (69% higher).

A postage stamp was 32 cents and now its 42 cents (31% higher).

What can we thank for the higher prices over the last decade?

Well, as strange as it sounds in the current deflationary environment, inflation stole your dollar’s value over the last 10 years.

Why Most Americans Don’t See the Dollar is Dropping

Inflation – especially over the years – is so subtle that most people don’t notice.

It’s a lot like boiling a lobster in a pot.

If you drop a lobster into boiling water, your lobster will try to escape. But if you drop a lobster into warm water, and slowly turn up the heat, lobsters won’t realize it and before they know it…they are boiling.

Guess who’s the lobster now? The American consumer.

The U.S. government and its close cousin, the Federal Reserve is pretty slick. They turn up the inflation heat by eroding your dollars slowly. But it’s consistent enough to where your dollar is worth much less just 10 short years later.

Think about it. If I’d told you that tomorrow morning you will pay 143% higher for gas and 90% higher for a loaf of bread…you would freak out. There would be rioting in the streets.

Of course, the U.S. government knows that too.

So the Federal Reserve ratchets up inflation just fast enough to help their causes (like paying back their debts with cheaper dollars)…but they do it slow enough to where most Americans won’t notice.

The Dollar’s Purchasing Power Continues to Plummet

Everyone tends to look at gas to see how inflation is rising. But the reality is that the costs of EVERYTHING you touch are going up astronomically around you and the dollars in your pocket buy less and less all the time.

What’s even worse is that while the costs of goods are on the rise again…unemployment is hitting its highest levels in 26 years. So that means that companies can’t raise salaries to keep up with the ever-rising cost of living.

And unfortunately prices are only going higher from here. In fact, in the next decade, prices could be another 50-100% higher than they are now.

Three Ways to Protect You and Your Family Against the Falling Dollar

You don’t have to be an FX trader to be affected by the falling dollar. No, just make a trip to the grocery store or try to fill up your tank, and you also have a vested interest in how the dollar performs.

Now of course, none of us can stop inflation. But there is a way to hedge against it, and the falling dollar. Here are a few ideas how…

• Diversify at least 15% of your portfolio into stronger foreign currencies including the euro, Aussie dollar and New Zealand dollar. You can do this easily with currency ETFs if you’re not ready to jump into FX trading.
• Calculate how much you have to spend on stocks and bonds for the next year, and then drop 5-10% of that into gold or silver. Again, you can easily do this with gold or silver ETFs.
• Look at your retirement plan. If your entire IRA is in dollars, consider upgrading with a long-term foreign currency CD.

Bottom line: The dollar is losing on all counts. As a trader, I can see the dollar’s overall decline happening on a day-to-day basis. But as a consumer, you can feel the dollar dropping where it really hurts – your wallet. Take action now to protect yourself.

Happy Trading,
Sean Hyman, aka Professor FX

A 17-year veteran in the financial markets, Sean Hyman has been a senior writer for FX University Daily since 2007, and a currency trader since 2001. Sean is also a featured speaker at our upcoming FX University. To hear more of his and our other experts’ ideas about how to escape the dollar in both the Forex market and “real world” read our latest special report here.