Home » Business » Is the US Manipulating the Dollar?

Is the US Manipulating the Dollar?

I’ve written before about the Obama Administrations attempts at raising trade barriers. So far they have been small and ineffective. But tariffs are not the only way to restrict the flow of imports. Monetary policy can accomplish the same thing while giving lip service to “free trade.”

magnifying glass and chart 0002

Instead of raising the price of imports by adding a tariff, devaluing the dollar will do the same thing. Either way, the cost of imported goods and services goes up making them less attractive.

Let’s examine some of the ramifications of lowering the value of the dollar.

The case for a cheap dollar.

1. It raises the cost of imported goods and services. Thus favoring American industry and American workers.

2. “Made In The USA” goods and services are cheaper overseas. Thus stimulating exports and helping American industry.

3. It reduces the possibility of a trade war by imposing import restrictions while giving the illusion of free trade.

Sounds pretty good! But all decisions have positive and negative effects.

What are some of the downsides to a cheap dollar?

1. It raises the specter of inflation. We import far more than we export. By increasing the price of those imports, oil for instance, we increase the likely hood of inflation.

2. It hurts third world economies. Smaller countries trying to jump start their economies by exporting to the US will be hurt. I don’t worry too much about BMW selling a few less cars in America. But I do worry about a small factory in Thailand going out of business.

3. It will be harder to sell our debt. We currently borrow 43 cents of every dollar we spend. Countries like China and Saudi Arabia, who hold trillions of dollars in US debt, will find the value of their holdings diminished. They will demand higher interest rates to compensate for their losses. As the cost of servicing our debt rises, money must come from spending cuts or higher taxes.

Is the Obama Administration pursuing such a policy?

We don’t know. But we continue to print money which devalues each dollar in circulation. World money traders think so and are driving the dollar down weekly. China, Japan, France and Russia think so. They are making plans to dump their dollars for a world currency to protect themselves against further losses.

It reminds me of the Chinese curse: “May you live in interesting times.”