Melonie and I have noted with alarm and dismay the declining value of the Dollar.
Some regular readers do not think that is as important as other economic issues.
Others, I submit, do not understand why a sound currency is so important. So forgive me for donning my professorial cap and let me explain a few things.
Money today is worthless in and of itself. That's right. Unless it is convertible into gold on demand it has NO intrinsic value. None. Zero. Zip. NADA ! What you can DO with money has value. Namely you can convert a specific amount into a good or service. You can save it and it can be lent to someone else. You can invest it and the recipient of your investment lends it; or buys goods and services necessary to expand its business or does something else that has value like R & D.
A perfect example is Confederate vs. Union currency during the Civil War. Other nations were willing to transact business with the Union and accept payment in gold. The Confederates lacked enough gold to buy the foreign goods and weapons it needed. All it could do was trade an equivalent amount of cotton for what it wanted to buy overseas. Likewise, within the Confederacy, so much money was printed that soon the Southern currency wasn't worth the match to burn it with. It had no intrinsic value and there was so much of it and so little to buy with it that eventually there was no real money based economy in the South. They were reduced to a barter economy.
We use the dollar to quantify value. Most of Europe uses the Euro. the British use the Pound etc. etc. When we buy a product or commodity overseas we pay for it in that amount of dollars needed to match the value of it in the native currency. According to the exchange rate. Most currencies "float" and are bought and sold so that they're value varies from day to day. The more our dollar is worth, the less we have to pay for foreign goods and products. And vice versa. Many things affect the relative worth of our dollar. One is interest rates charged by the Fed and paid by the Treasury. Relatively high rates vis a vis other countries encourage investment in OUR T-bills,notes and bonds. Likewise it encourages deposits in our banks.Our rate of monetary growth affects the value of the dollar. Too many dollars cheapens their value. That is part of inflation.
When we have high inflation, the dollar weakens because holders of those dollars or investments measured in dollars seek to put their money elsewhere to avoid having its value dissipate. When that happens, the Treasury has to raise the rate of interest on the debt it has issued to encourage investors to buy that debt. That creates even more pressure on the Federal budget because a greater share of said budget has to pay said interest on said National debt. But with inflation under control and a strong dollar that people want to hold, the Treasury does not have as much of that pressure.
Over the last four years or so, the dollar has lost a third of it's value. One direct consequence was the price of oil. It's benchmark of value was and is the dollar. A declining dollar increased the price. And more of those dollars were required to buy a barrel of oil and pay to have it shipped to the U.S. The oil shock of 2005-8 directly contributed to the mortgage meltdown. Marginal borrowers who were just getting by and staying current could no longer do so after getting hit with higher gasoline and heating oil prices. That resulted in many defaults and all that flowed directly and indirectly therefrom which I need not rehash.
There's more to it and others are free to expand and expound but that in a nutshell is why a strong dollar matters. As I pointed out in another thread, Clinton and Rubin gave us a strong dollar and we had economic growth and low inflation. Remember when gas was $1.00 a gallon ? It wasn't that long ago- 1998 and 1999. Reagan defended the dollar and we had growth and low inflation. G.W.Bush did NOT defend the dollar and it contributed to the oil shock. Obama has not defended the dollar. I suspect he does not want to and will not do so.
I think he will welcome high inflation to help him pay off all the debt he is ringing up. I think he likes the idea of $100 a barrel oil.



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