I hate what I am seeing in the forex markets right now. I am watching the US dollar slowly lose ground to the other major currencies and I can’t stand it! Naturally as a US citizen I have a bias toward my desire for the strength of the US dollar because most (read all) of the purchases I make are denominated in it. Unfortunately our politicians in Washington no longer seem concerned about the fate of the dollar and feel no compulsion to rein in the excessive government spending and borrowing that erodes the value.
Myopic politicians insist that if we simply print more dollars we will be able to fund our projected long term obligations. What these under-educated leaders fail to understand is that the “projected future expenditures” is a moving target which is based on TODAY’S inflation expectations. As you print dollars, inflation expectations rise and you guessed it: funding falls short because needed items cost more (in dollars) than expected because inflation occurs faster than expected.
Conversely the reverse is also true: if for example we rein in spending and reduce / eliminate our budget deficits and debt, inflation may come in significantly below expectations (so long as we spend *enough* to keep suppliers in business – ie supplies of goods don’t dry up), thus REDUCING the nominal/gross dollar cost of future obligations.
I do not see this current group of leaders understanding this fatal flaw in their plan. One only need look at modern day Zimbabwe to see how currency printing alone fails to fund debt/spending obligations. They need to make steep cuts now to expensive future expenditure programs, trim immediately any unnecessary spending, and raise taxes (particularly reversing the Bush Tax Cuts and removing the social security wage base tax cap) to bring the future revenues in line with and able to cover future outlays.
They need to get the idea of simply printing more dollars out of their heads. IT DOESN’T WORK!