The U.S. dollar continues to be the key to most investment markets. A weak dollar policy by the U.S. government (where the value of the dollar goes down) accomplishes the following:
- It makes our real estate and stocks cheaper for foreign investors.
- It makes our goods cheaper for export.
- It helps our large multi-national companies increase their sales and earnings.
- It increases the value of commodity prices as a substitute for dollars; investors would rather own tangible assets such as gold instead of a depreciating dollar.
The negative side of a falling dollar is that it eventually leads to higher inflation because a cheaper dollar is the result of printing more money that chases fewer goods; thus the price of goods will rise–inflation.
Eventually a falling dollar will force world investors to defer purchasing our U.S. bonds because bonds go down during inflationary times. If foreign buyers purchase a U.S. bond that gets a 3% return on their money, and the dollar depreciates 8% like it has done this year (because the government has been printing more money to fund its deficit spending), then the value of the investment has decreased 5%–that’s a negative return. This will eventually drive away foreign buyers of our debt. With fewer buyers, interest rates will rise.
Comments on this entry are closed.