WWS Swiss Financial Consulting : There has been a plethora of articles by market observers on inflation and its effect on the value of the US dollar.
Von Dr Walter W. Snyder, M.A.
Dollar inflation takes various forms, but one can find it if one looks for it in the right place. The prices of home in the US have increased a lot over the last year. The prices of used cars increased 21% y/y in April. Even the Fed has taken notice of the surge in inflation but insists that it will be temporary. Opinions differ on this point.
Investors are of course troubled by inflation since the money that they have in investments is worth less and less as inflation goes higher and higher. The US dollar depreciates as the federal debt goes up. It is now over $ 25.5 trillion. One could also note the $ 3 trillion annual budget deficit of the Administration and the record negative trade balance over $ 800 billion. Given such figures it seems almost to be a miracle that the dollar index has gone back up to 92 after being below 90 a month ago.
Apparently the Fed has the intention of devaluing the greenback. If the US dollar tends lower on Forex markets, then it would be easier for American companies to export goods, and that would be good for the economy. The difference between devaluation and depreciation should be kept in mind here. The end result is that the worth of the US dollar goes down. One thing that can help understanding the difference is to remember that “depreciate” is an intransitive verb and “devalue” is a transitive verb. Money depreciates but someone devalues money, e.g., Harold Wilson devaluated the British pound in 1967.
Of course there are many that think that the US dollar is not going to lose its dominant position as the most important currency in central bank reserves (59%) or its domination of global Forex markets where over 80% of transactions involve US dollars. There is also the point that much of global debt is denominated in US dollars. That means that there will be constant demand for US dollars for servicing dollar debt and paying off principal if the debt is not rolled over. On the other hand this also has the consequence that dollar debtors would welcome a significant and rapid fall in the value of the US dollar as that would lighten their debt burden and contribute to lessening the cost of servicing their debt.
It is highly likely that the US dollar is going to continue to depreciate as the Administration shows no sign of restraint in increasing the federal debt. The Fed continues to monetize debt and to feed funds into the economy and only talks about tapering while increasing the size of the repo market. The hunger for imports into the US has not abated, and American industry is not in a position to supply many of the goods that are imported. The negative trade balance will probably continue to be substantial even if it lessens a bit in the near future. The bottom line is that US dollar depreciation can be expected. The real question is how strong it will be and the pace of the loss of value of the currency.
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