Dollar continues to fall against foreign currencies

Fed Chairman Alan Greenspan and Rodrigo Rato, head of the International Monetary Fund, both spoke out on Thursday about the significance of the drop in the value of the dollar versus other currencies worldwide. On Friday, the euro was trading at nearly one euro for $1.30 (approaching a record value) and traded against the Japanese yen at a four-and-a-half year low. For most Americans, the dropping value of the dollar compared with the euro is not significant because most products we buy are not made in Europe. On the other hand, the decrease in the dollar's worth compared with the yen is very significant for American consumers. Many of the products sold in the U.S. are produced in Japan and China. Fortunately for consumers, the Chinese yuan is tied directly to the dollar; however, if the Chinese feel that the dollar is becoming too devalued, they may decide to peg the yuan to the euro (the strongest currency on the world market at present). If that happens, Americans will see a tremendous increase in the cost of goods that are produced in China.

Both Greenspan and Rato put the blame for the devaluing of the dollar on world markets with rising annual budget deficits in the United States. The budget deficit of the United States government is funded largely by foreign investment. As these foreign investments increase, the U.S. economy must respond in order to slow down inflation. Apparently (keep in mind I am NOT knowledgable in these things, but this is Greenspan's take on things), there are four ways to help control this international monetary imbalance--the U.S. government can reduce federal budget deficits to reduce foreign investment and boost domestic savings, the world monetary trade system can continue to drive the value of the dollar down which will increase the effective costs of repaying debt for the federal government--essentially increasing the annual percentage rate on money that we borrow to run the government, the U.S. could reduce domestic investment, or the U.S. could induce a recession to suppress consumption. Greenspan suggests that the last two options are not viable long-term solutions, and that allowing world monetary policies to control the imbalance will lead to higher interest rates in the U.S., a trend that Greenspan suggests is already beginning.

Rato takes a similar look at the budget deficit in the U.S. According to the Financial Times, Rato "stepped up calls for the US to take action to correct its current account deficit, saying a change in policy was 'needed to avoid getting into a traumatic situation'."

Notice that both of these men are discussing dire consequences for the U.S. economy if things are not done to offset budget deficits. If the policies of the Bush administration continue as they have for its first four years, the United States will be facing significantly negative economic conditions. If things do not change in the coming months, I hope that all of you 'moral issues' voters who voted for GWBush for one or two reasons will remember that the economy is also a moral issue!! If the Bush administration continues its misguided policies, perhaps you should ask yourself during the 2006 Congressional and Senate elections which party has been a better steward of the U.S. economy, which party has done more to put (and keep) money in the pockets of working Americans, and which party has done more to insure that this country is strong economically (and not just militarily) throughout the world! (By the way, the answer to all of those questions is NOT the neo-fasci-con Republican party. The moderate wing of the Republican party and the Democratic party both offer fiscal constraint and policies that promote growth, a strong dollar, consumption-related tax cuts, and reduced budget deficits.)

The good of the many outweighs the good of the few!!