While many people in America know a little bit about the Dow Jones, the S P;, the value of a barrel of oil, or their individual mutual funds, currency exchange rates (the value of a dollar versus other world currencies) isn’t something too many of us pay all that much attention to. The slipping value of the US dollar is a bad thing and is something everyone should pay attention to. But many will ask, why should I care? How is this value even determined? What does a weak US dollar mean for me as a US citizen?
How is the US Dollar’s Value Determined: Put rather succinctly, the value of the US dollar is determined by how much other countries are willing to pay for it. The United States has been in a recession for the last four years (at least) and the US economy has been operating in deficit status since the Revolutionary War. The reason that the US has never turned into a welfare state is because other countries have continued to be willing to fund our debt. Were there no opportunity for outside investors to make money from the United States, then we would likely be in a far different position.
Cheap Dollar amp; Debt:
The United States owes a lot of people money. Our national debt is around $13 trillion dollars at the writing of this piece. Debt is very near $14 trillion dollars. One fear of many of our foreign country debt holders is that the United States dollar value will decline meaning the value of the money they lent to us will be worth less when we pay them back. Also the exchange rate is quite unstable and not good to the country’s economy. Dollar euro conversion is also a bit questionable. Hence, it is important that the government does something in order to address the cheap value of dollar.
Cheap Dollar amp; Taxes:
As all Americans know, no one likes to pay taxes. There is a heated argument going on right now about the Bush Tax Cuts and whether or not they should be extended for everyone. On whatever side of the isle you fall on, one thing is clear: If the US has to raise taxes to pay off our national debts that means that US business owners will have less money to invest in their businesses. This slows economic expansion and further gets the United States in this quagmire of having to fund social programs for people who can’t get the jobs that business owners can’t create.
Cheap Dollar amp;
Foreign Investment: Here’s the kicker; the world today is a lot more connected and interconnected than ever before. The European Union has their individual needs with the Euro, middle eastern countries that produce things like oil have their own thing going on, and far eastern countries are growing their economies as well. So we are all interconnected and we are all able to exist more independently. That’s not to say that a nation like China or Saudi Arabia would not feel the pinch of not being able to sell the US their electronics or oil. However the US is now just a more restively sized piece of the larger puzzle.
Cheap Dollar amp;
Inflation: In a scholastic economic model, a cheap currency would lead to inflation. Exporting companies to America as well as domestic sellers would raise their prices just to keep their profits in line. However with unemployment so high, prices can’t rise because no one would be able to buy these products and services. So we’re kind of in a holding pattern. There have been economic woes in Ireland, Spain, Greece, and Portugal in recent months and people are just trying to keep their heads above water.
Truth be told the US dollar needs an injection of something or we very well could end up like one big welfare state. If any part of our carefully woven system were to pull back, then the results could be devastating. For now foreign countries continue to buy our debt, everyone is hurting, Armageddon is staved off for another day, and the value of the US dollar keeps chugging along. There is a shift which has happened though and if US investors and US citizens don’t take heed of the fact that the value of the US dollar is declining, then there may be one day when even the most bare essentials cost so much more than you could ever imagine.