well i'm no currency expert, but i have some observations fwiw.
i think all fiat currencies worldwide that are not backed by something (i.e. gold/silver) eventually become devalued. our clownbuck is only worth a 1/4 of what it was 30 years ago. since no one uses a gold standard anymore governments are free to print as much as they like and use inflation to transfer wealth from one portion of society to another. in our case, we continue to run deficits in order to pay for social services. usually governments run up debt to pay for a war, but in the absence of war we start a war on poverty and politicians garner votes by creating a class of dependants. they pander to this increasingly growing class of people by taxing the few and distributing to the masses. well just like in war this is expensive unless you raise enough taxes to pay for the services (not politically viable), so you can't have a gold backed currency because that puts constraints on things like massive deficit spending.
the reason the good old american clownbuck has done so well is not because it's a sound currency, it's just the lesser of evils. inflation is rampant all over the world, governments from sea to shining sea inflate the currency to transfer wealth from citizens to themselves or others. i guess people still like our currency only because the lack of a better alternative. even though many european countries run a sounder currency than we do, they all jumped on this euro bandwagon which is such a complicated undertaking that people don't trust it. the japanese have been in the printing business as well, we are not alone in that respect. they have tried to print their way out of deflation with monetary growth as high as 18% at times, when what they should do is let deflation run it's course in one painful swoop.
so even though alan greenspan and his cronies devalue our currency on a regular basis, there simply isn't any better alternative out there with the kind of economic stability we provide. (even though our stability is mostly a mirage).
everyone devalues their currency.
so getting back to the question of what if the u.s. chose to devalue, well for one thing i don't think it's in the government's best interest to do that. they are kind of in a bind, because a strong dollar has deleterious effects on our manufacturing base and exports, and hurts our multi-national companies. but to devalue would mean having to drive up interest rates which would choke an already weak economy--or capital would flee our markets which obviously are so important to the average american. also we can't have interest rates skyrocketing because the government needs to service the mounting debt which will only grow larger considering tax receipts are going to slow in the weakening economy and social services are going to skyrocket in in the next decade. baby boomers are going to retire in the next decade and also depend on costly medical care. there is going to be only 2 taxpayers to support each person drawing social security. i believe 20-30 years ago there were 16 taxpayers for every retiree.
i just can't see our government wanting to devalue the dollar, although it might crash on it's own accord no matter how much our government tries to intervene. the only way to keep our markets going, which is the only way to pay for boomers retirement and mounting medical costs, is to keep foreign money pouring in and to keep a strong dollar so we can get continue to flood ourselves with cheap imports. we can't afford to start paying higher costs for raw materials, that will squeeze profits and hurt consumer spending as prices rise.
of course if we continue on with a strong dollar we aren't going to do our economy any favors because exporters and multinationals will have to eat the currency translations or lower prices to attract foreign buying.
this is really starting to depress me because i don't see a way out. i can't think of any scenario that is going to renew a bull market anytime soon, because for our markets to resume their upward climb world economies will have to strengthen. well that's all fine and good if activity around the world begins to pick up, but that's where we run into a big problem. commodity prices are at historical lows and production has been on the wane. high energy prices only exacerbate the issue, causing all kinds of production to be cut. if economic activity picks up around the world the demand for raw materials and commodities are going to send prices higher. much higher. yes, i think commodities can continue to go lower here, but only if economic activity slows around the world. i see no scenario where commodities go lower as economic activity picks up. the only thing that is keeping a lid on commodities now is the asian contagion in 97/98, and then our slowdown here in 2000. notice how in 1999 and early 2000 commodities did really well when asia started to rebound and the u.s was full steam ahead. well i'm not sure how economies will be able to continue growing when faced with higher prices for raw materials.
the most likely scenario i see is stagflation. subdued economic activity but rising prices, simply due to the fact that there will be shortages and people will want hard assets and not trust paper money. the more weak the economy gets the more the government will try to print our way out of it, and the more people will switch to hard assets driving the demand up even more.
it is possible for demand for hard assets to grow even in the face of a stagnant or slow growing economy. just look at the seventies. all the money that went into stocks and bonds the last 20 years has to go somewhere. if there isn't much economic growth to support stock prices and governments around the world compete to devalue the currencies even more (the original question) people will gravitate to what's real, not what's paper. in the past that was gold. i don't know if it will be the chief beneficiary this time around, we need oil and energy desperately to function. we don't need gold. nonetheless i think gold will do well, but there might be some commodity lurking out there that catches the public's attention and does better.
i hope some of what i said (any of it in fact) made sense! |
