Economics, Politics, Social Commentary and occasionally Superstring Theory.

Thursday, December 02, 2004

The Dollar's Freefall

The Economist (subscription required) has an excellent article on the falling dollar. Of course, they explain it in a much better way than I ever could:

"THE dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it."

It goes on to cite unnamed experts who predict a further 30% decline in the dollar's value. However, experts are never of one mind, as an article in the Financial Times points out.

“People are beginning to wonder whether this [dollar sell-off] has gone too far and that there might be some kind of correction before the year-end,” said Aziz McMahon at ABN Amro.

South Korea also jumped on the coordinated currency intervention bandwagon with EU and Japan, although they have yet to make a move.

If the foreign central banks start buying greenbacks to weaken their own currency and strengthen the dollar, they're going to have to print their own money to do it. The EU would be better off cutting its own interest rates, and hence spending the newly printed money, on stimulating domestic consumption. Additonally, any intervention by these banks are only going to prolong the problem. Winston Churchill once said "The Americans always do the right thing, after they've tried everything else." The U.S. will continue to print money until the rest of the world forces economic reality upon it.

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