The dollar has served as an extremely convenient medium of exchange, and as long as world productivity has increased, the expansion of the number of dollars in circulation world-wide has not proved inflationary for the dollar.
Normally we consider deflation and inflation to be opposites, and normally we associate deflationary periods with declining spending and declining prices. But within the United States, since our currency has turned into a world currency, we might well experience simultaneous recession and inflation. I guess this is what was called "stagflation" when it happened in the 1970s.
1. The dollar starts to decline in value.
2. Our domestic economy has become, except for agriculture, largely a service economy. We import much of our clothing, oil, steel, and many other goods and commodities. As the dollar decline these are automatically marked up in price, unless the supplying countries choose to absorb the hardship of being paid less. But at some point prices must rise to reflect the real cost of producing those commodities and goods.
3. As prices of imports start to rise, Americans cut back on their purchases. This affects not only the countries exporting to us, but also the distribution systems inside the U.S.
4. Cutbacks in spending lead to layoffs, and layoffs lead to further cutbacks in spending. But as the dollar falls, goods and commodities become more expensive (as priced in dollars) even though there is less total demand for them.
5. Also, with increasing layoffs, it becomes impossible for millions of Americans to keep up the payments on all their various kinds of debt. Bankruptcies become epidemic. The holders of the debt themselves go bankrupt. Bonds go into default.
6. As the American financial system falls into disarray, confidence weakens even further in the US dollar. Oil exporters want to be paid in other currencies.
7. The only way to restore value to the dollar is what Paul Volcker did: raise interest rates to incredible (now) levels. The first move in that direction sends the stock markets on down, and every percentage point increase takes the stock market down at least another 5%.
8. This country is forced to live through a protracted period of economic misery, with many people out of work, real wealth greatly reduced, and high prices for essential goods and commodities. Or put it another way, Americans may have to put up with a standard of living lower than that being enjoyed in Europe. This will be painful.
As Thomas Hobbes put it in the seventeenth century: "Happiness consists in prospering, and not in having prospered." |
