THIS MEMRI article discusses the prospects of the mujahadeen conducting economic warfare against the US via the dollar. This article is a classic example of not understanding why one currency rises or falls compared to another. The key passage in my view is this:
"The author lists among the key factors the economic damage caused by Hurricane Katrina; the losses caused by the September 11 attacks; the cost of the war on terror and of the wars in Afghanistan and Iraq; the U.S.'s persistent trade deficit and growing government debt; investors' growing faith in the Euro; the recent subprime crisis in the U.S.; and the fact that financial institutions around the world have started to reduce their dollar reserves, thereby flooding the market with dollars and decreasing the demand for this currency."
The author ends his analysis with the following threat: "The dollar can expect two additional blows that will break its back... [namely] the announcement of the return of the Caliphate..." and the reinstatement of the gold standard in international monetary trade."
The items listed in the first paragraph are some reasons why the macro economy has slowed down, but not why the dollar has depreciated relative to other currencies. I would point out that other countries have had weather problems, mortgage failures and terrorist attacks too, and their currencies have not significantly depreciated. In fact, the drop in housing prices has made the U.S. real estate a very attractive investment opportunity for outside investors, and quite a few have been buying up dollars to buy property recently.
No, you have to look no further than interest rates to understand why the dollar has devalued relative to the pound, the euro and various other currencies. In general, the U.S. interest rates are lower than many other country's, so investors will tend to sell dollars and buy those other currencies to invest in securities in those countries with higher interest rates. The reason why there is the difference in interest rates is due mainly to inflation. The U.S. has a lower inflation rate than most other countries today, ergo the U.S. interest rate is lower at this time, and the dollar devalues comparatively. As the differential between the U.S. interest rate and other interest rates dissipates over time (and it will), the dollar will appreciate, the other currencies will depreciate and so forth.
The second part of the the article discusses going back on the gold standard. The concept of going back on the gold standard is just silly, and anybody who suggests it either does not understand how economics works or is trying to con you.
When you tie your currency to gold (or silver of some other commodity), you eliminate your ability to conduct Monetary Policy. Why? Cause you limit your ability to expand your money supply during a time of growth to your ability to find more of that commodity. You can't just buy more gold cause what do you buy it with? Gold? Additionally, you allow some other wealthy country to play games with your money supply and interest rates just by buying up (creating a shortage) or selling (creating a surplus) large amounts of that commodity at their whim on the open market. In reality, by going on the gold standard you have abdicated your ability to conduct Monetary Policy and manage your economy.
So where do we go from here? Well, first we let the free market work. As inflation continues to climb around the world, investors eventually hit a point where they see their purchasing power erode and they invest in currencies where inflation is lower, such as the U.S. right now. Second, the cheaper dollar makes U.S. goods very affordable, so foreign investors buy dollars to then buy those goods. This then leads to economic slowdown in those other countrys, then falling interest rates, and so the dollar appreciates in value comparatively. Third, we do need to start conserving on our fuel consumption/drilling domestically/building refineries to slow down the economic bleeding caused by the high cost of fuel.
So.... the mujahadeen can go pound sand.
~ 3 Wood
STUCK MOJO: I'M AMERICAN!
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