blkmage (post: 1211441) wrote:Foreign demand for the US dollar has nothing to do with whether the US is well liked or not. Demand for the US dollar has everything to do with demand for US exports. The only way the US dollar's strength can suddenly evaporate because of unpopularity is if the States became so unpopular that no one wanted to buy anything from them. As long as you guys continue to make things that the rest of us wants to buy, you have nothing to worry about. A currency's value is based directly on the exports and imports of that country, not on it's political popularity.
What exactly does America produce nowadays? From what I can tell, pretty much every major factory has gone to China or some other similar country. That leaves us with services: lawyers, doctors, computer repairers, construction workers, etc. The problem with services, is that they are tied to the person who can perform them. If the dollar is to survive, foreigners will have to buy our goods and services. Since we don't have any goods to speak of, that means that foreigners will be hiring our professionals to do foreign work. This means that the money trail will start leading out of America. This has been a problem for a long time, and has caused America to shift from producer to consumer. Continue reading for a full explanation.
Technomancer wrote:This is true, but you've also ignored the flipside, which has a lot to with why the gold standard was abandoned. By not being able to increase the money supply when it is needed, large-scale economic disruptions also occur. Banks can't lend money they don't have, which can reduce economic growth to a snail's pace.
The gold standard isn't a perfect solution. But something needs to be done. Inflexibility and a snail's pace economic growth are minor issues compared to the total destruction of the dollar and the big pit of debt that America has dug itself into.
Explanation:
The value of fiat currency is based on popularity. Not necessarily the popularity of the national policies, but the popularity of its economy. There are plenty of countries who hate America's guts, however, when it comes down to it, they still invest their money in American dollars. They do this because America has built up faith in the dollar by surviving every depression and recession that has been thrown at it. The American economy was the first SuperEconomy of the new industrial era to develop, as such it has quite a bit of momentum and notoriety behind it.
However, America isn't the only SuperEconomy anymore. A new conglomerate of small nations have banded together and adopted a new monetary standard, the Euro. The Euro has the advantage of being diversified and backed by many different countries comprising the European Union. This new “Euro” doesn't have the long track record of dependability that the American dollar has, but it has a much more stable base. Whereas the Euro has become stronger as it has become accepted, the dollar has begun to weaken (see below for extrapolation).
It won't take long before investors start noticing this discrepancy. When they do, they will start diversifying away from the dollar in order to gain the better growth benefits of the Euro. They probably won't totally abandon the dollar because the dollar has the home field advantage, but even if half of our investors started buying Euros instead of dollars, it would be disastrous.
The dollar is weakening, and the ways to stop this trend are decreasing (a return to the gold standard is one possible solution). Currently, America produces far less than it spends. It was once an industrial society, now China, Hong Kong, Taiwan, and other such countries have taken on that role. We are now a consuming society. This means that we buy more than we produce. That is why our government is trillions of dollars in debt. In order to get out of this debt, the government is doing two things, it is getting foreign investors to finance our debt, and it is inflating the dollar (printing off money to pay off the debt). Both these things are adversely affecting the value and stability of the dollar.
The only way our economy has survived this long, is because people have faith in the dollar. We have been the “top pick” as far as international economies are concerned, so we have been able to get plenty of investors to continue the pyramid scheme. With the Euro, however, the dollar in no longer the only reasonable choice; people may decide that the dollar isn't the best deal. If that happens, we will have trouble finding enough investors to borrow money from to pay the interest on all of our other debt.
Our government is also printing off more money. Because our economy consumes much more than it produces, the government is printing money in order to make up the difference. This is a very short term solution, however. The more money that the government prints, the more money they rob from current dollars in the way of inflation. If I was an investor, I wouldn't want to invest my money into something that is losing 3-10% of its value every year. If it were me, I would invest in Euro. This is compounding problem number one (getting foreign financing for current debt, see paragraph above).
All of this makes the outlook seem very bad for the dollar. There is one bright side, however. Our massive spending has become the foundation of man other countries' economies. Lots of places, like China, can not afford us to stop buying their goods. We are locked in a death dance. We can't afford to keep spending money, and they can't afford for us to stop spending money. In a way, our greatest export is our willingness to buy imports with the dollar. In other words, our export is the dollar. The affects of this are everywhere: more and more people are trying to get fewer and fewer jobs that pay money that is worth less and less. Eventually, we will hit the end of the road. What happens at that point is uncertain.
The solutions to this problem are difficult to come by. We could switch to the gold standard and trigger Armageddon early (and face the problem before it gets much bigger). We could deliberate and argue until the dollar dies, at which point the whole economic structure of the world would become undone. We could adopt the Euro, which the fiercely independent Americans would never agree to. We could try to somehow become a producer again (which would be the best option, but extremely hard to implement). Perhaps we could come up with a different solution that hasn't been discovered yet. Take your pick, none of them are painless.
