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Category: Money

The US Dollar is Doomed

Written on November 15, 2010 by Japhet Writ

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Now that the Fed Chairman Bernanke has rolled out the printing presses for QE2, many believe the dollar will soon be worth less than a square of toilet paper. The argument goes that this is an unwarranted expansion of currency.

There is a theory that an expansion of is unwarranted. However, this theory requires a consumer to believe that the ’s value is determined based on the gold standard. Simply put, an individual must believe that the more there is in circulation, the less each of it is worth. The value of the is determined by its potential to make . Hence, a higher demand for dollar causes it to strengthen.

But nowadays, money is flowing out of due to various reasons. For instance, there is the carry trade that enables businesses to borrow in cheap and buy another currency to invest and profit offshore. The ’s serious effects signals both USA and foreign based businesses to borrow money at very low interest rates. The borrowed money will be used to gain profit anywhere across the globe. is supposed to create a low-interest environment for USA economic expansion, rather than an exodus of investors in parts of the world where there is greener pasture. Hence, foreign investors are no longer required to buy if they are investing in India or China.

With the value of dollar driving relatively down, the game plan is to make American products to be cheaper than offshore products. Other way is for consumers to recognize the ultimate use of dollar as a medium of exchange. When buying and selling are not nearly equal, this results to trade imbalance. Therefore, currency adjustments would make the exports of the surplus countries more expensive than the deficit nations, and imbalances would be corrected. However, the price of domestic items would experience pricing pressures. This can occur due to a competition between lowered standard of living and inflation.

are not always traded in an open market freely. Some of it are being pegged to other . With a foreign currency having a defined fixed exchange rate with the US dollar, the trade imbalance grow without market interference. Akin to a rubber band, the imbalance can stretch further and further. But the hanging question is to whether this tension can snap eventually like a rubber band? Or can they be relieved in a controlled manner?

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