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The Plummeting Dollar Prosperity Plan |
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Friday, 05 June 2009 |
 It is becoming painfully obvious that the Fed, Treasury, and Administration's disastrous recovery plan hinges on the devaluation of the U.S. dollar. Their specious strategy stems from the belief that a falling currency can re-ignite exports and spark a recovery in manufacturing
while putting a floor in U.S. asset prices. But just as the President's initials indicate, the plan stinks of B.O.
Firstly, a falling currency does nothing to expand a country's exports
or domestic production. Let's say for example, country "A" has a dollar
that is trading in parity with that of country "B". Let us then assume
that country A departs on a currency printing policy that mimics that
of the United States. Let's also say that because of the increased
supply of newly minted dollars, the value of country A's currency is
eventually cut in half. Then, just one unit of country B's currency can
be exchanged for two of A's dollars. The mistaken belief held by those
who espouse a weak currency is that now country B can buy two dollars
worth of goods with just one unit of their currency--thus expanding the
foreign demand for A's goods and ushering in a manufacturing boom.
However, what they neglect to understand is that the inflationary
policy of A has not left the dollar price of the country's goods
static. In fact, the value of goods and services provided by A should
have doubled as the purchasing power of the currency was halved. The
result being that country B is immune from A's inflation and can
purchase the same amount of goods with just the same amount of money.
The resulting problem is that not only has A done nothing to stimulate
domestic production, it has discouraged foreign investment while
destroying the purchasing power of the dollar, sending prices for both
domestic and foreign purchases out of reach for the average consumer.
The resulting inflation eventually discourages domestic manufacturing
because the purchasing power of the country's middle class and poor is
wiped out. The result of skyrocketing prices is that discretionary
purchases are eliminated, causing massive job loss and plummeting GDP
output.
History clearly shows any such currency devaluation strategy to be a
complete failure. In 2005 China announced it would increase the value
of its currency and abandon its decade-old fixed exchange rate to the
U.S. dollar in favor of a link to a basket of world currencies. Since
then the Yuan has rallied from .1208 USD to .1467 USD. But the falling
dollar has had a negligible effect on U.S. exports. For all of 2005 the
U.S. deficit with China was $201.5 billion. In 2008, three years into
the dollar devaluation, it soared to $266.3 billion. And despite the
worst economy since the great depression--which caused U.S. imports to
decline sharply--the annualized rate for 2009 is still $201.2 billion.
If all a country needed to do to achieve manufacturing supremacy and
economic dominance was devalue their currency then Georgia and Bosnia
would be considered paragons of economic prosperity. That's because a
country's economic health, productive output and balance of payments
has less to do with the value of the currency and more to do with tax
rates, union influence and environmental legislation.
As long as we continue to substitute spurious growth models for genuine
growth policies we will continue to lose global power and influence.
The only part of the current plan that is sure to work is the cessation
of falling asset prices. Unfortunately for us, that will come at the
risk of creating intractable inflation and putting our foreign
creditors on notice that we will destroy not only the value of their
U.S. dollar holdings but the very value of the currency in which they
are denominated. Who does Mr. Geithner think he’s kidding? The Chinese
have already moved to purchase short dated Treasuries so as to allow
them an easy escape. They may also dramatically curtail their
purchases. For a country that needs to issue nearly $3.25 trillion
dollars of debt this year alone and trillions of dollars for many years
to come, that is disastrous for this debt-laden economy.
Source: Micheal Pento, Greenfaucet.com, Delta Advisors
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