This post is kind of an open reply to one of our dearest critics and harshest friends, aon, who a few days back left a comment suggesting that the recent devaluation in the dollar was going to be a problem for the US in paying back foreign-held debt. I don't think this is the case. National bonds are held in the currency of the nation issuing them. That is, T-bills are sold in dollar denominations with a given interest rate and a set payoff date. If the Chinese want to buy them, they have to convert their yuan into dollars to do so. If we want to pay them back, we pay them in dollars, not yuan. I don't think the devaluation has any effect on this.
A dollar is just a thing like a lamp or a computer or a desk. Its value fluctuates with supply and demand. If Germany has a higher interest rate on their government bonds than the US, then people will want to buy those and will sell their dollars to buy Euros. Demand for dollars will fall and demand for Euros will rise and therefore, the dollar will be worth fewer Euros. That's one cause when a currency drops in value.
That's kind of thumbnail sketch of the way I understand it. Corrections in the comments are welcome.
3 comments:
I think that's correct, what it does is make it more expensive to fund the debt. So if you have a continually weakening currency, the Chinese will likely decide to invest in Euro based bonds instead. This causes the fed to have to increase the rates on bonds in order to sell them, so it costs more to fund the national debt.
The other problem of course is that if the $US is worth 1/2 what it was, the Chinese can buy twice as many at the same price, if I understand your point correctly. And that money is then used to buy oil/gimcracks from abroad that will cost twice what they would have done.
Therefore, your money is worth 1/2 what it was and puts China in a stronger position.
It's not really surprising that the current administration wants to attack Iran, when you think about it. They're the ones who have seen this and want to move the sale of oil from $ to Euros.
(btw, I'm not the Anon. above)
And, just to put it on a more personal level:
You are currently selling your house.
In the end, if your house sells for twice what it did 8 years ago, it will only buy the same amount of imported goods (your wealth) as it did back then.
That's not allowing for inflation which makes it an even worse bargain. However if your property taxes are based on your property value, they have effectively doubled (again, plus inflation and any increases).
And of course, if your new house was worth more 8 years ago than your current one, you're paying a bigger mortgage and more interest than if they hadn't risen at all.
In short, a rising house market coupled with the fact that, unless everything you buy is completely sourced from the States, is not a good thing.
As an example using nice round figures:
Year 2000:
House A was $100,000
House B was $200,000
Year 2008:(With prices doubled)
House A $200,000
House B $400,000
Where you could have upgrade to a nice house 8 years ago for $100,000 it will now cost you $200,000. And that increase is due to the low interest rates that have allowed people to turn it into a buyers market.
And why are the interest rates so low? Because the govt wants to borrow as much as it can. For what reason? Healthcare for all citizens? Roads, bridges and levees? Bulding up international goodwill?
No. Because wars don't fund themselves.
"Poverty of the State exchequer causes an army to be
maintained by contributions from a distance. Contributing to
maintain an army at a distance causes the people to be
impoverished." Sun Tzu. The Art of War.6th cent. B.C.
Post a Comment