BF2S Forums US Dollar's fall from grace

Okay, first of all, you're saying that a worthless dollar means we won't have any purchasing power and our 'economy will grind to a halt'.

This is absolutely not true. A weakened dollar only means we won't have any purchasing power of IMPORTS. International trade only makes up less than 15% of our GDP (e.g. toyota cars are not imports. they are products of the american branch of toyota, sold in dollars. however they worsen our current account deficit by sending profits to their headquarters in Japan). Yes, a weakened dollar will mean imports will be inflated.

However, if you are saying that our purchasing power is decreased due to inflation sparked by the low dollar (as companies sub-contract multiple parts of their products in foreign countries, their costs rise due to exchange rate transactions, and this increased cost is passed down to the consumer in the form of higher prices), then I understand. I don't know that much about this yet, all I know is that this is what Ron Paul is saying and Ben Bernake isn't.

Why would we make and export steel when other nations are more efficient at it? We should focus more on technology and services, things that the US and the EU are good at.

I would like to reiterate what i've written above: "actually, loose monetary policy like that doesn't occur anymore, not since well over 50 years ago. that policy of printing money is morein line with what south american countries did 20 years or such and so ago."

Money growth (money supply/printing money) is actually pretty moderate according to Ben Bernake. And we've only reduced interest rates due to trying to help the credit crunch of the subprime mortgage crisis. We don't do this all the time and the Fed generally doesn't like loose monetary policy (changing the interest rate lower) because it breeds inflation. Inflation in the US would mean foreign companies won't invest in the US as much, and sell their assets there (weakening the dollar). This weakening of the dollar would mean more inflation in the US (according to Ron Paul). However, low interest rates help the banks, which then help the various economic sectors that have been hurt in mortgage crisis. So I think Bernake weighed the pros and cons of lowering the interest rates and decided to lower it for the time being.

Sorry I made a mistake above. Instead of the sentence: "Fed is not printing money, it's borrowing money. and its borrowing with T-bills and other variants. treasury bonds. " I meant: "Fed is printing money, the Treasury Department (seperate government entity) is lending T bills and treasury bonds to fund its budget". I wanted to point out that there is less confidence that the US is able to pay back its debts, because of its current account deficit, and therefore foreign investors are selling off their assets in the US, weakening the dollar. The Fed printing money doesn't directly weaken the dollar, it increases inflation, and that makes investors less than happy, which also makes them want to sell off their assets in the US.

The Fed printing money: Money supply = monetary policy, is different from lending Treasury Bills (T Bills) in order to fund the government budget, which is fiscal policy. The Fed is the Central Bank (monetary), the Treasury Department is one of the bureaucracies under the Executive Branch of the US government, which is ruled under the President. The Fed as a central Bank is much more independent from the government than other central banks. It does however have to report to Congress (Legislative) occasionally, but it retains its secrecy and independence.

Shrinking dollar is the result of too much spending on the war. Currency is relative to other countries cuurency and the value of currency is dependant on expenditures and the amount of debt carried by a country that is in foreign dollars. The US is spending way to much on the war relative to other countries that are not spending anything. That was a real reason why we shouldn't have gotten into the war without other countries to share the debt load. Now the currency is shrinking because the defecit is spiriling and there is no end in sight to the war where other countries are not spending one single cent on the war.

The real cost can be seen in gas prices where supply is steady but prices have been rising. The Dollar is shrinking and all imports are rising in cost including oil.  That's bad but what is worse is that IF the contracts for oil are written in a foreign currency, say the euro, or Canadian dollars, then the demand for those dollars increases relative to the US dollar. This amplifies the weakness of the Us dollar and is in large part a reason for the dramatic rise in the Canadian dollar vis-a-vis the US dollar.  Next time the gas at the pump lowers in price check to see if the US dollar has gained strength... the two are related.

Compound those problems with the increasing debt load for the war, then the dollar shrinks every more because of fears over the US having too much debt and later having to raise taxes to pay it off, so speculators dump US dollars. Couple that with the mortgage loan scandal.

Another factor is foriegn countries, like China, arab countries, or even european countries that don't like US policy, see the US economy as being weak becuase it is saddled with war debt and is less flexible in its ability to fight off an economic attack and so they see an opportunity to hurt the US economy and so they dump dollars on the market.

AS for interest rates and the Fed.... Nothing can be done, if you lower interest rates to perk up the economy then investment money leaves the country for higher interest rates, the demand for US dollars goes down and the US dollar shrinks. If you raise the interest and try to prop up the dollar then you hurt an already weakened economy and throw it into a depression. The fed and the government are dammed if they go up and dammed if they go down, so they course of action is to float this out.

Right now the economy and the dollar are floating and there is nothing that the fed or the government can do about solving the problem. I bet there more than a few people in the Whitehouse that are praying that something else does not happen like the American public discovering the truth that the entire US economy is on the bubble. The US economy has become a talk shop and the worst is yet to come.