The US dollar continues to fall, is a replacement currency coming?
by Michael Koenecke
The American dollar, the most powerful tool in the world for trade and banking. Not for much longer. The US dollar has long been used as the standard for the world reserve currency. This situtuation could change however, if inflation continues to rise and the US continues to ignore the growing problem. The Euro currency as of this moment is working with the US dollar to form some sort of stability. In this article we’ll look at the different causes of why the value of the dollar is decreasing and how it in turn affects other countries. All facts and information in this section are provided by http://www.plim.org/01%20usa_dollar_devalua.htm.
It all started at the end of WWII when the Bretton Wood agreement was reached. In this agreement it stated that all countries would use the US dollar to back up all the money printed in their banks instead of using gold or silver. The problem with this is when the value of the dollar decreases banks in other countries are forced to sell there US dollars in order to not lose money. These banks then invest in currency with a higher value such as the Euro. The main problem with the actual US dollar is, it is only paper and that paper is only backed up by so called good faith. Other currencies are backed up by metals such as gold and silver.
What else is the US dollar used for? Whenever a country has to price goods or services in the global economy they use the dollar to set these prices. All major commodities are assigned values in such a way. The problem that arises here is that when the US dollar loses some value other countries get scared and so they increase there prices to counteract the decline. Hence oil prices have increased to nearly $50 a barrel now.
One important global effect of the dollar decreasing is an overall decrease in living standards. Once the dollar goes on a decline people around the world are forced to spend more money on a lesser amount of items then they might have done in the past. All the money people have saved also declines in its buying power. Hence if people cant get the same items they could have before with the same amount of money the standard of living declines.
Alright now we have defined what the effects of the US dollar decreasing would be. Let’s move on to why the US dollar would decrease in the first place.
Right now the United States holds a deficit between $80-100 trillion. The only way the Federal Reserve Bank , which regulates US commerce, counteracts this is to print more money which causes prices to rise. Because there’s more money available in the marketplace the overall value of a single dollar decreases.
Two main causes for a increase in the deficit is the US budget and the trade flow. Budget deficit occurs when the overall budget of the US is greater then the revenue it makes from taxes. With additional costs such as wars and what not, the gap has continued to increase drastically. The trade deficit gap has also continued to increase. This deficit occurs when the US imports more items then it exports. Both of these deficits put together lead to a huge gap in the US economy, nearly one trillion, and hence leads to the a decrease in the dollar.
So what happens if the US dollar declines to the point where countries are losing serious amounts of money. Some options available to these countries are the newly formed Euro or other such currencies. Gold and silver has seen a major resurgence from the decline in the dollar. Many investors and large bank corporations have recently purchased large shares in gold and silver companies. Something interesting that most people don’t really know is that compared to the Euro the dollar has declined 30% over the past four years.
That said, countries look for the best currency to replace the US dollar. That currency at the moment appears to be the Euro. However as a right now the Euro and the US Dollar are trying to work with one another to solve some of the problems that exist. We’ll look at some of the occurrences that keep the two currencies from not being able to balance out. All facts and information in this section are provided by http://www.easy-forex.com/forexmarket/dollareuro.asp.
As the Euro and US Dollar try to find ways to work with one another, this site actually claims that the concern over the decreasing Dollar shouldn’t be seen as such a big issue. They claim that if the US continues to grow strongly it should attract strong foreign investments and renewed good faith in the dollar.
Some of the reasons why the Dollar and the Euro should work to help one another out are for economical reasons. If the currencies are valued the same, products will be able to be sold easier because prices will be the same. Also if the currencies are balanced it will cause a fix interest rate to occur, which is better for consumers.
However many factors effect this from happening sometimes. One main factor is the business market. Factors such as government intervention, competition and market size effect how the currency is looked at and performs. The stock market is also a important factor to how currency is viewed as well as political factors and economic data.
Many Americans are not that aware of the serious problems dealing with the value of the dollar. All most Americans see is the price of oil rising. Hopefully the value of the US dollar will turn around through continued strong economic growth. If not, the Euro might be looked heavily apron as the main replacement of the US dollar in the world economy.
Sources: The Web pages of:
http://www.plim.org/01%20usa_dollar_devalua.htm
http://www.easy-forex.com/forexmarket/dollareuro.asp
