TOP DRAWER ARTICLE

A Falling Dollar
by
HL Carpenter

The strength and/or weakness of the dollar spark many debates and - when our currency falls in value – much concern. What makes the dollar decline? Here are a few reasons:

• U.S. government overspending

• American consumers buying too much

• U.S. government overprinting money

• Asian countries not spending enough

How do these behaviors impact the dollar? To simplify a complicated subject, let’s call the government you, the American consumer me, and Asian countries they.

The government (you) is overspending. The American consumer (me) is buying too much stuff.

Because of war, global tensions and domestic issues, you are carrying a large deficit. Factor me, with my purchases, credit card debt and bankruptcies, into the mix and we’re both in trouble. Then add rising oil prices. Suddenly you have to either print more money or rely on someone else to help pay your bills.

Asian countries (they) aren’t spending enough. If you keep buying what they’re selling and they aren’t buying what you’re selling, they will soon have more of your money than you have.

That’s okay if they turn around and use all that money to finance your debt. This kind of money management keeps interest rates low. Low interest rates mean a stronger dollar. That allows you and me to keep spending and buying.

But there’s also a problem with that scenario. You and me are no longer financing our own deficit. If they decide to stop sponsoring our debt and instead move the money into their own or other foreign securities, the dollar could decline to a serious low.

At that point, you and me would be paying more for what we buy and borrow. Now both of us to have less money to spend.

Is there a way to curb the dollar’s decline?

Maybe. Since most economies are cyclical (some are going up while others are going down) you and me could wait for a monetary crisis somewhere in the world that might stabilize the dollar.

Or we could do the extraordinary. You, the government, and me, the American consumer, could spend less and save more.

Since neither event appears imminent, the debate, the concern – and the decline – will most likely continue, at least until you and me care enough to do more than talk.

Originally published May 2005.

Last update: January 8, 2011