Declining Dollar
Description: Declining Dollar, Economic Crisis?
The currency of the United States of America, the dollar has long been used as an asset deposit for the wealthy because of its stable value compared to other currencies. However, since the arrival of the Euro, and the declining value of the US dollar, many investors try to switch in their dollars for Euros and other currencies.
Enablers:
- Military interventions: Iraq, Afghanistan being the latest two examples in which the US spends a lot of money (investment) and does not profit from it sufficiently.
- Increasing oil prices: The US is particularly dependant on oil.
- Rising trade deficit: The US is importing more products than it is exporting (inflation +1)
- Rising budget deficit: Government spending increases more than government income (inflation +1)
- Risky financial policy: Mainly the Chinese and Japanese government currently invest largely in US treasury bonds to make up for the deficit. But when these investors find better opportunities, the dollar will collapse and chaos will follow. Some believe [2] that the US is in a very uncomfortable financial position.
Inhibitors:
- Growing economy: The US still has a strong economy
- Faith that the US will recover: The last time the dollar dropped was during the Reagan presidency where it declined by 40% and still managed to recover.
- The rest of the worlds economy is very dependant on the US: Major inflation in the US will eventually cause problems in the rest of the world.
- Falling dollar increases export (cheaper American products for Europe/Asia/Australia/Africa), stabilizing the trade deficit.
- The next president will probably outperform the financial policy of the Bush administration, resulting in the recovery of the dollar.
- The Japanese and Chinese government (probably others also) invest heavily in the US to keep them going.
Paradigms:
- Before: The US dollar is the safest currency to invest in because of the stable value and strong economy.
- After: The Euro can also be a safe substitute for the dollar. Right now it actually is.
Timing:
Bush administration, and its financial policy of tax-cuts and spending too much. Terrorist attacks, 9/11, war in Afghanistan and Iraq.