Tuesday, March 24, 2009

The Devaluing of American Currency Continues

Commentary: Time for another tea party?
[...] as the federal government continues to print money that isn't worth the paper it's written on and as our national debt soars past $11 trillion, a United Nations panel is set to recommend that the world ditch the U.S. dollar as its reserve currency in favor of a shared basket of currencies.

One of the enduring strengths of the dollar has been that it has always been the currency of choice in times of crisis. But that's not the case anymore.
Our ballooning deficits have driven down the value of the dollar so much that the Chinese government recently asked for guarantees from Washington that the Treasury bills they own are safe. [...]

If the dollar is perceived as unreliable, it could lead to global "dumping" of all assets in American currency, further devaluating the dollar.

Fed to pump another $1 trillion into U.S. economy
[...] to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months.


In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Since last September, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.

The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise. [...]

So we are creating this massive debt for ourselves, which is also devaluating the dollar internationally, which also weakens it at home. We have to pay interest on this debt, which keeps growing. What happens when interest rates go up, the interest on our debt it compounded, nations globally begin dumping our currency, and we can't borrow any more? And that causes a massive run on our banks, requiring the Fed to print up even more money, in order to comply with the FDIC? You might as well ask, What would a U.S. currency collapse look like?

1 comment:

Anonymous said...

You put that so eloquently! This is just one more reminder that the only real way to keep our economy strong is not by raising taxes, but by keeping taxes low, fair and simple.

We need to take action and contact our legislators and sign petitions like the ones the U.S. Chamber of Commerce backs (here).