The dollar is still the world’s “reserve currency”
How much is the U.S. dollar worth?
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“Let the influx of money be ever so great, if there be no confidence, property will sink in value…The circulation of confidence is better than the circulation of money.” —James Madison, Speech, Virginia Convention, June 20, 1788
According to data from the University of Illinois professors Lawrence H. Officer and Samuel H. Williamson, the value of the dollar had depreciated so much by 2008 that it took $5.31 to buy what it cost $1 in 1971 when Nixon decided that the dollar would no longer be backed by gold. Until then, $35 could buy a troy ounce of gold every day. Our dollar today is worth less than 19 cents when compared to 1971 and the price of gold fluctuates between $1,500-1,700 per ounce.
Between February 2002 and December 2004, the value of the dollar dropped against the euro by 40 percent, a significant decline that was largely ignored by the media. (William J. Baumol and Alan S. Blinder)
The U.S. dollar has continued its decline in spite of the rosy economic picture presented by the MSM in the last four years.
Members of Congress cannot claim ignorance about the declining trend of the U.S. dollar because Craig K. Elwell, a specialist in Macroeconomic Policy, wrote a report on February 23, 2012 for the Congressional Research Service, “The Depreciating Dollar: Economic Effects and Policy Response.”
Any currency, including the dollar, is affected by demand from foreign governments, foreign nationals, or foreign corporations who wish to purchase goods, services, and assets from the country that issues the currency.
In order to buy our stocks, bonds, real estate, goods, and services, foreigners must first buy our currency, thus creating a demand for it.
The supply of dollars comes from the Federal Reserve System (the Fed) who prints money or issues electronic credit to its member banks. Transactions are made directly in cash or electronically in the form of debit and credit through the bank of the buyer and seller of currency.
If we have a large trade deficit with other nations, and we do because we usually import more goods than we do export, the value of the dollar decreases. The dollar decreases in value as a direct response to the “net increase in the supply of dollars on the foreign exchange markets.” (Craig K. Elwell)
A net increase in the demand for dollars on foreign exchange markets can increase the value of the dollar.
According to Craig K. Elwell, in 2007, “at the peak of the last economic expansion, the U.S. capital account recorded $1.5 trillion in purchases of foreign assets by U.S. residents (representing a capital outflow) and $2.1 trillion in purchases of U.S. assets by foreign residents (representing a capital inflow).”
Congress cannot affect exchange rates directly, but the value of the dollar “can be affected by decisions made on policy issues facing the 112th Congress, including decisions related to generating jobs, raising the debt limit, reducing the budget deficit, and stabilizing the growth of the federal government’s long-term debt.” (Craig K. Elwell)
In other words, stop regulating the remaining U.S. industry to death while destroying small businesses that create jobs. Stop the non-existent man-made global warming nonsense. Everyone knows that politicians want power; it is not about the environment. Stop catering to the United Nations third world dictatorships. Stop wasting taxpayers’ dollars on solar panel black holes, invest in natural gas, clean coal, nuclear, and fossil fuel generated energy. Stop the non-existent green job creation lie, the Tesla “brick,” and the GM Volt electric car that nobody wants to buy. We want mobility. Stop sending our jobs overseas. Stop building corporate headquarters and entire industrial cities in China or India with U.S. dollars. Stop spending money we do not have. Stop borrowing money from China in order to spend it on wars, welfare, policing the planet, and supporting third world dictatorships who wish us harm. We are not Don Quixote de la Mancha “tilting at windmills,” attacking an imaginary enemy. We want to build a successful future, not the pipe dream of progressives.
Investors look for countries with a stable government, a high rate of return, good economic growth, and low inflation rates to park their excess capital. During the period of 1994-2003, U.S. had an expected rate of return of 8.6 percent (International Monetary Fund).
Current low interest rates in the U.S., kept so by Fed policy, give the U.S. no interest rate advantage over other developed countries. It is thus in the better interest of investors to move their capital to emerging economies, putting a further strain on the U.S. dollar.
If the dollar was expected to depreciate further due to a weak economy and out-of-control government spending, dollar assets would not be attractive to investors, they would seek new ways to diversify. By doing so, the value of the dollar would be eroded even more. “Diversifying to other currencies would be troublesome for the $11 trillion in U.S. securities held by foreigners.” (Craig K. Elwell)
The dollar is currently holding on because U.S. has a high degree of liquidity (securities can be turned quickly into cash with a daily turnover of $588 billion) and a variety of assets such as the bond market ($32 trillion total, $11 trillion government bonds).
Although the United States has been a safe bet in the past for foreign investors, as the largest debtor in the world, the federal government is now a default risk because of its lavish spending, which can downgrade Treasury securities and thus weaken the dollar.
Long-term assets are no longer seen as safe in the U.S. The dollar dropped 17 percent in value during 2009-2011. The European Union debt crisis in 2011-2012 with the potential default of Greece, its two bailouts, Italy’s bailout, Spain and Ireland, and the austerity measures demanded by Germany and France, gave the U.S. dollar a boost in value of 5 percent.
Central bank holdings are propping the U.S. dollar for the time being, in particular China with $3.2 trillion in exchange reserves, and Japan with $1.3 trillion.
The rising inflation rate in this country is depreciating the dollar as well. The purchasing power of the dollar is falling. All you have to do is take a trip to Italy. Prices are 44 percent higher not necessarily because of higher manufacturing costs, but simply because the exchange rate of the dollar against the euro is so weak.
A depreciated dollar will indirectly cause interest rates to go up. Current Federal Reserve policy is to keep interest rates low as a “monetary stimulus.” Despite low interest rates, demand for loans by small businesses and households is low because so many people are unemployed and businesses do not wish to expand in an economy burdened by expensive regulations and the specter of Obamacare liabilities. The Fed policy cannot successfully control both exchange rates and interest rates.
“The IMF study estimated that if the dollar had remained at its peak of early 2002, by the end of 2007, the price of gold would have been $250 per ounce lower, the price of a barrel of crude oil would have been $25 a barrel lower, and nonfuel commodity prices would have been 12 percent lower.” (Craig K. Elwell)
When the President says that nothing that we do can affect the price of oil, even if we drill everywhere, he is disingenuous. We can start by repealing the unfortunately named Affordable Healthcare Act that is bankrupting the country. We can drill on our own soil. We can implement logical and sane energy policies that restore the health of the U.S. economy and foreign investors’ trust in our government. The dollar is still the world’s “reserve currency.” China and Russia are trying to replace the dollar with another currency as trust in our government’s fiscal responsibility is waning.