If the US dollar falls what does this mean to Ecuador? Recently a reader sent me this note:

“Gary your thoughts on this article in regard to Ecuador and the dollar value there. Thank you.

‘LONDON (AFX) – The OECD has warned that the eventual rebalancing of the US current account gap ‘looks increasingly unavoidable’ and will send shock waves across the globe, starting with a slump in the dollar’s exchange rate.

‘The OECD said in its world economic outlook that the depreciation faced by the dollar could be ‘of the order of one-third to one-half.’

‘The adjustment in the deficit would ‘need to induce a sharp slowdown in US domestic demand and that this would have adverse spill-over effects on other economies both through the trade and asset revaluation channels,’ it said.”

I believe that a drop in the US dollar could actually benefit Ecuador. Because the greenback is Ecuador’s currency, it has competitive troubles with competing nations such as Peru, Colombia and Argentina when they devalue their currencies versus the dollar. In the long term being dollarized is good as it reduces inflation and stops politicians from turning on the printing press.

A US slow down will not seem good for the global economy though in the short term. Like all disciplines, the change appears to create pain. However the world has stretched this imbalance, letting Americans for a very very long time buy and buy stuff they cannot pay. The politicians have not corrected this, so the market will instead. The US really cleans up by the way. If the dollar drops by half, the spending power of the payback of the huge US debt is cut in half as well. Bad news for those who hold the dollar. Good news for future US tax payers.

This is true for Ecuador also. As the purchasing power of the dollar falls, so too does Ecuador’s significant US dollar debt!

The total impact of such a huge shift in economic arrangements is quite murky but one thing is clear. In US dollar terms, Ecuador real estate will rise. All commodities, labor and real estate will rise in US dollar terms as the US currency loses purchasing power.

Ecuador has some other fundamentals that could help it do well in a global crunch. First, the people are sweet and easy going with few expectations of government care. Second, the country is rich with earth, water and sun. Crops grow everywhere and it is typical as in the picture below that people have a huge garden right at their home. Third, Ecuador’s low capital, low cost labor environment could be more stable during difficult times. Finally Ecuador as a leading oil exporter gains. As the dollar drops, Ecuador’s debt drops and oil prices rise, helping fill in gaps.

Be aware, this fundamental shift in how the world’s economic system works is fraught with danger. The world has been feasting on debt and America’s unruly consumption. When the dollar falls dramatically and the global currency system comes unhinged, everyone will feel the diet. Some will embrace it and move ahead. Most will suffer and where this suffering leads is impossible to tell.

Here is that typical house near our village of Cotacachi, Ecuador with the garden.

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Until next message, I wish you freedom from worry through good health and knowledge!

May, 2006