The importance of a strong currency
- From: Charles Aulds <caulds@xxxxxxxxxx>
- Date: Thu, 17 Jan 2008 21:21:02 -0400
Immediately prior to World War II, as world tensions and instability
increased, overseas investors moved funds to the safety of the United
States. The Canadian dollar fell 6 percent against the US dollar in the
two weeks prior to Canada's declaration of war against Germany on 10
September 1939 and fell another 3% before the government imposed foreign
currency exchange restrictions that same month. The British pound fell
even more sharply, 14% that month. The Commonwealth was at war with
fascist Germany, and the outcome was by no means certain!
That was an example of how a strong US dollar actually brought wealth to
the country from abroad (in the form of investment). The United States
enjoyed a huge influx of wealth in the form of foreign investments because
of the soundness of the its currency, and the security it provided against
worldwide economic and political instability.
By the same token, though, a WEAK US dollar can cause wealth to flow FROM
the US to other countries. This is happening now. The past decade has
been one of TREMENDOUS transfer of real wealth from the United States to
other countries, particularly the oil-exporting nations of the world but
also those that have a production and manufacturing capability (and low
labor costs) that the US no longer possesses.
There are three primary criteria that make a currency suitable as a
"reserve currency".
A reserve currency...
1) offers a very stable rate of exchange
2) is the currency of a nation that
practices sustainable economic policies
3) is the currency of a creditor nation
(the US is now a debtor nation)
In other words, assets placed or held in a reserve currency are expected
to hold their value over time and to be backed by a government that
practices sound fiscal management. The US dollar, long considered the
default reserve currency of the world, may no longer satisfy the
requirements of a reserve currency. Why should any country which has
surplus wealth choose to hold that wealth in a depreciating unit of
currency? Why should a country that possesses an asset (like crude oil)
that is worth more every day exchange that appreciating asset for a
depreciating one?
Preserving the value of the US currency is essential to preserving the
country's wealth, because it will uphold the status of the US dollar as a
reserve and as an exchange currency. Restoring the country to a sound
fiscal footing has become essential.
In no small way, the decline of the US dollar is due to the two middle
east wars, and the massive borrowing required to pay for them (in lieu of
tax increases). The Bush Administration has consistently given lip service
to a strong dollar policy, but actions really do speak louder than words.
The fiscal policy of the Administration has been one that consistently
devalues the US currency, by reducing interest rates in order to entice
domestic banks to borrow more from the federal reserve system which gets
the money it lends from overseas creditors. The Bush Administration is
intentionally devaluing the US dollar in order to postpone an economic
recession until the Republican Party is out of power. It's the height of
irresponsibility, and it is destroying the economy of the United States.
It's time to realize that 4 more years of governance by the same party
will be disastrous.
We need change.
We need it now.
____
Charles
.
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