I am wondering what happens to the value of the coin in a country with an housing crisis. Take the USA as an example: They had a housing crisis and I wonder how it effected the value of the dollar and why? In addition to this particular example, are there any general effects on a currency that are observed in countries in which a real estate bubble burst?
1 Answer
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It is not immediately obvious precisely when the recent US housing crisis took place: prices started declining in 2006 (https://fred.stlouisfed.org/graph/?g=cvjE) causing disruption in the financial markets in 2007. The peak of the crisis was possibly in September 2008 when Lehman Brothers failed and the mortgage securitizing enterprises Fannie Mae and Freddie Mac were taken over by the federal government.
US consumer prices fell slightly in the second half of 2008 (https://fred.stlouisfed.org/graph/?g=cvjm) while it was rising both before and after that period, so you might say money became slightly more valuable in terms of goods and services
In the same period, the value of the US dollar rose against other currencies (https://fred.stlouisfed.org/series/TWEXB), typically described as a flight to safety by worried investors during the worldwide financial crisis
There is no particular reason to believe exactly the same things would happen in other housing crises or in other countries, but it is reasonable to expect a housing crisis to reduce consumption (the construction sector shrinks while others feel poorer) possibly leading to a recession and perhaps lower inflation.
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$\begingroup$ But that is the problem with the dollar and USA in general, the dollar is a safety currency and when there is a crisis in USA a crisis in the world follows. Thank you for the information. $\endgroup$– OrenJan 28, 2017 at 11:28