Friday, May 29, 2015

Dollar Danger

I must start with two premises and a rumor. The first premise is that nothing of importance is done in today's federal government unless it is the Presidents idea. The second premise is that the President doesn't know his posterior from page eight about economics. Let me add a "rule of thumb". The administration will do anything they can to fill the tax coffers.

Now, the rumor. Any person or company, any place in the world, doing business in dollars will be subject to IRS regulations. That sounds pretty simple and not very threatening, right? It is as threatening as the bite of a rattlesnake and even deadlier.

The United States has a negative balance of trade. We buy more than we sell. The United States is also a debtor nation. We borrow way too much. The only reason that we get away with this is the strength of the dollar. The dollar's stability and the soundness of our stock markets have made the dollar the currency of choice in international trade. Many entities around the world hold dollars just because of that.

For a number of years now the dollar has been under fire. Those that hate us and those that compete with us see the dollar as a target. In particular, the Chinese would love to see the yuan take the dollars place as the preferred currency. As the trading value of the yuan is artificially controlled, they have not succeeded.

But if the rumor about tying the IRS into all dollars, no matter where they are held, is true, it will mean the death of the dollar in international trade. Those that own dollars will, immediately, sell them and purchase another currency. The euro and the yuan would be two obvious choices. Since the euro is in a very fragile state right now, the yuan would be the obvious winner.

The value of the dollar would drop. Those bargain clothes that people buy at Walmart and Target would suddenly become much less a bargain. Fruits and vegetables imported from South America during the Winter would languish as the prices rose. The American lifestyle, already suffering, would suffer even more. Once again under this administration the poor and middle class would be hurt while the elite march on unfazed.  

1 comment:

  1. You make a good point here and it seems clear that the federal government has too many policies that simply presume that the USD will always remain the world reserve currency.
    The truth is that we are dependent on the Saudis to maintain this status for the USD. As long as we protect Saudi Arabia from Iran and ISIS, and pay the tab, the Saudi's will continue to enforce OPECs policy of only accepting payment in USD. As long as OPEC does this, then other markets will continue to demand USD so that their major participants will have a source of USD so they can buy oil.

    This is why many people sarcastically refer to the US dollar as a 'petrodollar'.

    Like it or not this joins us to the Middle East until we return to sound fiscal policies.