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Dollar Devaluation Worries

March 17, 2008

moneyproduction.jpgOver the last two years the dollar has weakened continuously as the printing presses of the Federal Reserve have roared into the night to produce money for two war fronts in Iraq and Afghanistan. The last year has exposed continuing weaknesses against other currencies like the Pound and the Euro. Today, the U.S. dollar hit the lowest value in 12 years against the British Pound and the lowest ever against the EU Euro. The continued weakness will likely work against international tourism and travel as the devalued dollar drives reality home to Americans.

The massive trade deficit continues to increase, enhanced by the weakness of the dollar. Demand for many imported products may decrease as stressed consumers make their own budget cuts against personal luxuries. Business would do well to respond in advance by reducing imports somewhat in the short-term instead of counting on consumers to spend more on imports. The National Debt continues to rise exponentially as survival techniques by the Fed are now required to keep the economy operating in a normal fashion. Last June, Paul Volcker, former Federal Reserve Chairman suggested that the United States had an excessive flow of liquidity. “The truly unique power of a central bank is the power to create money, and ultimately the power to create is the power to destroy.” As early as 2005, Richard Russell, the editor of Dow Theory Letters stated that perhaps “we’ll be unable to handle all the debt, the dollar will swoon, and the U.S. will sink into a recessionary deflation. Either way, it seems to me that the dollar will be in extreme danger. If we inflate, it will simply be a dilution of the purchasing power of the dollar. If we deflate, the very stability of the dollar itself could come into question.” What Mr. Russell fails to explain is that economists don’t decide between inflation and deflation. Those are determined by economic conditions generally beyond the immediate control of money managers and policy makers. Both inflation and deflation are destructive and work against the economic power of Americans and can work against the global economy as well.

The recent decline in the dollar has resulted in levels prevalent before the Asian financial crisis in 1997. Perhaps, an “invisible inflationary response” was carried out by U.S. Fed policies enacted since that time. It is already well established that low U.S. inflation rates have been concocted by paid economists. The current reality of U.S. inflation is at least 18%. The U.S. economic correction has come to term, brought to an acute stage by the mortgage banking crisis. America’s global trade and current account imbalances are above 5 percent of U.S. gross domestic product. These levels are unprecedented. Economic historical theory shows that this level of imbalance is generally considered to precede a period of extreme financial stress.

Keep in mind that in normal circumstances, a currency valuation decline is part of a natural market response and can act to balance the economy. By making American exports less expensive abroad, a decline can help the U.S. sell goods more easily, provide some support to remaining U.S. manufacturers, and help bring deficits back to sustainable levels. Unfortunately, outsourcing has resulted in a less than optimal economy. Dollar valuation levels that are uncontrolled or too low can bring the U.S. to levels of a third-world country with unsustainable and plummeting purchasing power. Recent bank and financial stresses threaten the stability and orderly adjustment of the U.S. economy. Rapid unmanageable drops can cause financial panic and additional recessionary pressure. Over the long-term, a weaker dollar can be inflationary, thus forcing interest rates up. Inflation could have the extreme consequence of eroding the dollar’s 60-year role as the world’s reserve currency resulting in a difficult financial environment for Americans. This position could threaten purchasing power for energy markets and managing international debt.

The latest drop in the dollar is not a cause for panic. If stability of the U.S. economy can be managed, the drop in the dollar can bring a healthy balancing of the global trade accounts, along with growth. If stability of the U.S. economy cannot be managed, U.S. credibility and market confidence could tank, resulting in crisis and financial shock. Whether this current economy will be ultimately considered as a healthy market adjustment or as a nasty financial storm depends on managing the current banking, financial and economic crisis in the United States. We have limited our national options because of outsourcing. The country is in a precarious balance. ~ E. Manning

5 Comments leave one →
  1. March 21, 2011 10:20 pm

    Hear me people of America…flee your dollar and invest what you have left into physical silver and gold or face a grim future.

  2. October 18, 2008 5:42 pm

    Dr. D…Are you serious? Inflate our way out of debt? The dollar is the reserve currency of the world, which means all the other central banks hold their reserves in US Dollars. If we keep printing money and devaluing theirs and our dollars, then what happens when the Euro or Yen becomes the reserve currency. Trillions of dollars would flow back to the US causing hyper inflation. Sure, our debts would supposedly be easier to pay off, but our purchasing power in the US would be close to nothing. The government wants you to believe a little inflation is a good thing. It helps them pay off debts and fund our welfare state and military empire.

    The weak dollar might work ok for a little bit, but once the Chinese and Japanese realize that there is a market at home for their goods, what will we do? When they stop exporting goods to us and start buying it for themselves, what will happen?

    Right now it might be working, but when all these dollars that are held in foreign central banks comes back to us, we’re going to see hyperinflation.

  3. October 15, 2008 8:34 am

    I think the author got it backwards. He says that “The massive trade deficit continues to increase, enhanced by the weakness of the dollar.”

    I think it is a strong dollar that encourages trade imbalance. That’s why Asian central banks prop the dollar up. The stronger the dollar, the cheaper foreign goods are to us, so we buy them instead of making them at home.

    A weak dollar will make foreign goods more expensive and their manufacture at home more profitable. We’ll pay more for them, but the money will stay at home.

    It seems to me that what we need is a weak dollar. I’m not sure at all that the Fed and Treasurer have it wrong to run the printing presses day and night. Couldn’t this force the foreign bankers to quit artificially pegging the dollar’s value? We have an enormous debt internationally — the author and I agree on this — something on the order of a trillion dollars owed to Japan and China.

    One solution is to simply inflate our way out of debt. They have a ton of dollar designated debt. Why not pay them off in dollars that are worth one-thousandths as much?

    My understanding is that the Great Depression was caused by the Fed preventing enough dollars from flowing. There were tons of goods but no one had money to buy them. The Fed won’t make that mistake again. Just observe the hundreds of billions they are pumping into the economy right now through the bail out. The recessionary deflation the author worries about is not going to happen. All the Fed has to do to prevent it is to open up the dollar spigot.

  4. Bank charges permalink
    March 21, 2008 9:26 am

    Hi Tntalk,
    Its really amazing ..Well done. It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

  5. March 17, 2008 8:48 am

    Central economic planning has never nor will ever work… so the U.S. credibility and market confidence will continue to tank.

    Besides, this isn’t just about our national bank… the EU has apparently sided with the FED and is going to debase their currency as well. This will be a global recession…


    Thanks James. Good observations. ~E.M.

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