Accounting for Changes of the US Dollar
It seems that in recent years, we haven’t been able to turn on the TV without hearing about the deficit. This has been especially true in recent months, where the headlines have been dominated by budgetary unrest. This is difficult for many Americans to stomach, often times because of the lack of general public knowledge that seeps out. Unfortunately, the American media serves as a strong filter that keeps such a majority of political occurrences under wraps. Then again, this is typically done for our protection. At this stage, however, many Americans just shrug off the budget and ask why it matters. “Can’t we just print more money?” are the common responses we come up with. Let’s explore this option.
In the past, printing more money was always the route we took. It was convenient and could be effective. Sure, we’d have to deal with inflation occasionally, but other than that, things were ok, right?
Not really.
Because the World Reserve regulates trade using the US Dollar, we’ve always had an advantage in international commerce. This meant, in effect, that if Brazil wanted to purchase products from Japan, they would have to first purchase American dollars and complete the exchange in USD currency. If we wanted to buy the same thing from Japan, we could jump straight into completing the transaction. This advantage led other nations to buy large sums of USD currency, often proving quite profitable for the United States. However, China and Russia have reportedly begun to trade with one another in each other’s currencies. In fact, China, the world’s second largest economy, has been unloading a lot of USD.
As far as the debt goes, many nations have been outraged over time because of the devaluating effect our frequent mass printings have had on them. Let’s say, strictly as a hypothetical example that Great Britain owned 2% of our nation’s total currency, which they spent 5% of their nation’s total assets to obtain. If we begin to print our own currency, then it’s worth less. If we print 25% more than what we already had, then all of a sudden, they’ve given us 5% of their nation’s total assets for only 1.5% of ours – although the agreement was for 2%. Many nations have become irritated by our freely-printing ways, claiming that we aren’t necessarily keeping up our ends of the bargain.
Now it doesn’t take someone with an MBA in Accounting to see that these nations are right about what’s happening. Unfortunately, because of our national spending habits, we haven’t had much other choice. At this point, however, as we have run into the federal debt ceiling (basically maxed out our credit) we have to make swift and effective decisions. Because of the damage done to our trade relationships with other countries (keep in mind what China is doing), we’re now in a position where we can no longer afford to carry out these same practices. The only real choice we have left is to find the balance between raising taxes and cutting spending. As Americans, it’s time to brace ourselves, as we will be the ones bearing the brunt of this.
