In order to really understand the value of the U.S. Dollar, one must have a basic grasp of interest rate theory in relation to currencies.  Each currency in the world has an interest attached to it that is set by its Central Bank.  The manipulation of this interest rate increases and decreases the supply of a currency in the economy and therefore will either stimulate or tighten economic activity.  During the 2000’s, Fed Chairman Alan Greenspan kept U.S. interest rates at very low levels versus other industrialized nations around the world such as England, Australia, and the EuroZone.  These low interest rates in the U.S. led investors to flee from the U.S. Dollar in search of higher yielding currencies, which resulted in a very bearish U.S. Dollar run.  In this picture of the Euro, you can see the dramatic fall of the U.S. Dollar throughout the 2000’s.

In 2008, when the Global Credit Crisis really exploded in September of ’08, the currency market went crazy.  There was a mad rush into the U.S. Dollars as unprecedented fear caused investors to demand the safety of their capital above everything else.  From September of 2008 to March of 2009, the U.S. Dollar experienced a dramatic rise in value versus the Euro, Pound, and nearly very currency in the developed world.  The reason is because in times of complete uncertainty, the U.S. Dollar is the safest place to park capital.  Investors want assurance that their investment is safe, so they opt to place capital in low yielding but very safe investment vehicles such as U.S. Treasuries.

In March of 2009, the recession bottomed out.  Economic growth resumed in the developed world and it looked as though the worst was behind us, so investors began taking their money out of the safe, but very low-yielding U.S. Dollar and placing it in riskier currencies that were offering higher risk.  Thus, began another round of Dollar weakness.  Let’s take a look at another Euro chart.

The U.S. Dollar was very weak throughout the 2^nd and 3^rd quarters of 2009.  Then, in November of 2009, the Greek Debt Crisis erupted and send financial markets into a tailspin yet again.  Investor sentiment weakened around the world, and there was another mad rush into the safety of the U.S. Dollar.  The Dollar rallied significantly against the Euro from November of 2009 until June of 2010.

Once the European Central Bank finally stepped in to pledge bailout funds for Greece and other struggling EuroZone countries, investors again began to sell the U.S. Dollar in search of higher yield and the Dollar began to fall versus every currency pair.

This phenomenon of the U.S. Dollar doing well only during times of economic distress could be a long-term sign of bad things to come.  Currently, the only reason investors want to hold the U.S. Dollar is for safety.  There is no interest in it as an investment.  What will happen if the U.S. loses its place as a harbor of safety?  Investors already want nothing to do with the Dollar during good times.  What if they don’t during bad times either?  That could spell disaster for the U.S. Dollar.  A forex demo account can teach you how to take advantage of the volatility in the  FX Market.

Mr. Carpenter explains the most reliable credentials for investment advisers, CFP (Certified Financial Planner), and CFA (Chartered Financial Analyst). Still, Madoff was a legend on Wall Street; a number of high profile charities and corporations were invested with his company. When people with resources like that get bilked out of billions, what’s the average American to do? According to Mr. Carpenter, there are warning signs regardless. Read the article here.

Madoff is the founder of Bernard L. Madoff Investment Securities LLC and separately managed money for high-net-worth individuals and hedge funds through an investment advisory business he oversaw. Madoff was charged with securities fraud on Thursday after federal investigators called his operation “a giant Ponzi scheme.”

According to The Wall Street Journal, Madoff was buying and selling options, which are orders that allow someone to buy or sell stock at a given price within a given time frame. The orders don’t have to be placed. The Wall Street Journal Weekend Business Podcast for 12/12/2008 states that, while buying and selling options is a viable investment strategy, it would be impossible to execute given the enormous amount of money Madoff was managing.

What is a Ponzi Scheme?

Ponzi schemes operate on the promise of high rates of return with little risk; no different from most investment schemes in that regard. In a Ponzi Scheme, however, portions of new investors’ funds are siphoned off and paid as returns to older investors. Older investors think they’re getting great returns when the money is actually coming from the new investors. In the end little, if any, real investment actually takes place. The scheme is able to operate as long as there is a constant flow of new investors; as soon as new investment slows or stops, there is no longer money to pay the older investors. We may find that this is just how Madoff got caught…with the slowing economy, he no longer had a steady flow of new investments to pay the old investors. This is just speculation of course, nonetheless, this appears to be the largest investment scam in U.S. history, causing irreparable losses to thousands, including many large charities.