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It's a myth that devaluing the dollar is a way to deal with the deficits and debts. There are many historical examples showing how disastrous it can be to print money as a way to deal with deficits and debts. I use history to share relevant examples and to learn from history, so hopefully US do not make the same mistakes. That is certainly better than speculating about US economic future with no supporting historical foundation.
Let me give you some historical examples, as you can study these historical examples of hyperinflation and the events leading up to it. You will find there are some scary similarities between these examples, and what USA is currently facing. Example of hyperinflation include France 1789-1795, US Civil War 1861-1865, Germany 1920-1923, Russia 1921-1924, Austria 1921-1922, Poland 1922-1924, Hungary 1922-1924, Greece 1943-1944, Hungary 1945-1946, Argentina (Austral Plan 1985), Brazil (Cruzado Plan 1986), Yugoslavia 1993-1994 (Tito). Tito felt the answer to his country’s problems was just print money. We know what happen to Tito and Yugoslavia, right?
Ben Bernanke will be the new Federal Reserve Chairman soon. When a new Fed Chairman takes over, the market will usually test him, and I expect he will be test quickly. Will he sacrifice the purchasing power of the dollar? Will he fail to learn from these historical examples and be a historical disaster like the examples above?
Here are some reasons not to devalue the dollar:
1. More expensive future borrowing on existing debts and deficits.
2. Reduced purchasing power of the dollar means US Americans will suffer more as the dollar buys less.
3. Hyperinflation can ensue just like historical examples above.
4. Decrease demand for the dollar as Central Bankers look to other stronger currencies, and alternatives for their reserve portfolio.
5. Decrease the good faith and credit of the US as a world reserve currency, and hasten Central Bankers to rebalance away from it.
6. A myopic scheme that will hurt the US economy long term, when it doesn’t deal with the real problem.
7. Doesn’t address the real problem of lack of savings, and the ability of Americans to self-finance and not rely so much on foreign financing, thereby losing more leverage daily.
8. Doesn’t address the real problem that American goods may not generate enough demand for the dollar worldwide, thereby weakening it further.
9. Doesn’t address the real problem of systemic long-term financial problems within the US. When Social Security, Medicare, and Pensions are in deep trouble, devaluing the dollar will reduce American purchasing power and make a bad situation, worse.
10. Interesting sensitive industries like real estate and all the allied industries like building, construction, suppliers, etc. that depends on a robust real estate economy will also suffer as interest rates goes up.
11. Suppliers of goods and services will need to increase prices just to stay even with inflation and not allow it to eat away their profits. This is a double strike as consumers will have less purchasing power from a devalued dollar, and face higher prices for goods.
12. Consumers will also feel the pinch of a devalued dollar as they increasingly look to price leaders like Wal-Mart to buy what they need. This in turn will further erode demand for the more costly US produced goods, and further erode what is already a sick manufacturing base.
13. Countries like Japan and China provide cheap financing to the US because it also gets some great benefits like trade surpluses. If US were devaluing the dollar, it will reduce the incentive for Japan and China and all the other Central Bankers around the world, to continue providing cheap financing since the dollar cannot maintain its strength and purchasing power.
14. Since the Euro is a viable currency alternative, if the dollar is devalued long term, don’t be surprised that Central Bankers around the world move permanently to stronger currency alternatives.
15. As Iran implement its bourse, and others will either do something similar or use Iran’s bourse, there will be a greater need to use a stronger currency like the Euro as the instrument of trade, since the currency risk of a weaken dollar is just poor business.
16. In the horizon, I can even see a potential AU, with China and other Asian countries getting together like Europe to create a united block of economies based on one currency, and this AU currency can be a third world reserve currency. Therefore, it is more important for US to maintain the strength of its currency and retain the faith of world Central Bankers so US it can still be a world reserve currency.
17. Oil transactions are in US dollars for now, because of the perceived strength of the dollar backed by the full faith and credit of the USA. If US are going to devalue its dollar long-term and continue increasing its deficits and debts, it will destroy its credit, and undermine the world’s faith in the dollar. Therefore, that will hasten the world to find, use, and adopt viable alternatives like a bourse, barter agreements, and other market mechanisms that eliminate and or mitigate dollar currency risk. This would be a major reason not to devalue the dollar as US doesn’t need to give the world more reasons to dump existing dollar holdings and stop buying new dollars denominated assets.
[ Last edited by raymondusa at 2006-1-30 09:48 PM ]