The US Dollar vs the Euro
written by Richard, 1-10-2005 in response to a question:

Andrea, just a few thoughts regarding your looking into the Euro-Dollar problem, and why the Dollar is losing its value against the Euro. The US has two problems that cause and affect this situation. One problem is the exploding national budget deficit. The second is the exploding trade deficit. The first is primarily a domestic overspending, and the second is an issue of how much less we are exporting than importing, the difference being a judgment against our national worth and needing to be subsidized by other means. In both cases, the US has an exploding, rising debt with no end in sight. Furthermore, these are costs of “on-the-record” deficits and don’t begin to give the actual overage spent by the US government on domestic obligations. If the debt resulting from budget overage, plus trade export shortages, plus off-budget obligations, plus unfunded mandates such as social security added up together indicate the nation is in debt way past the value of the value of real estate and assets of the entire nation. In your home that becomes a state of panic called bankruptcy with no solution. However, governments have historically endeavored to find a way out. To slash the deficits would be too painful to the public palate as it would entail allowing a depression of unimaginable proportions, making “The Great Depression” look not too bad in comparison. The alternative is to continue overspending to meet national and public priorities. To do so, there has to be a way to pay the debts while nursing the need for an ever-expanding demand for more money for domestic and international needs and wishes. The way that governments have historically used to solve this problem is called inflation. Inflation is the opposite of deflation, and is essentially a hidden tax on its constituents. It seems like your assets are rising in value, when if and when the dollar (or whatever currency) returns to its true value you will discover the increased (temporary) value was a hideous tax. When it returns to value, the price of the house you buy this year may fall to its true value in the future, which would for you be a deflated price and therefore an actual loss. Deflation lets the air out of a balloon and the result is painful, even while it is realistic. Inflation keeps adding helium to the balloon and helps it fly higher than thought possible. This means works for a time unless the problem can not eventually be solved, in which the balloon that has soared to incredible highs pops and its drop to earth is devastating.

The chosen preference historically, and currently, is the way of inflation. Inflation makes it seem like prices are rising, although they are not. Rather, the value of the currency that buys the product is decreasing, and it takes more dollars (or whatever inflated currency) to buy the same thing. The value of the car is not more, just the value of the currency is less, taking more dollars to buy it. In national terms, if the government owes a large debt, it can default and not pay which is bad for the receiver and he will not loan money to the bad creditor again. However, if the currency is devalued, the government can print more money (unlike what you can do at home) and pay the debt with more paper. The more the paper the less it is worth, yet you have paid your debt. The creditor will have less value, but at least his debt gets paid. If there is enough reason to be paid in cheaper dollars, you let the creditor get by with the procedure. In the current case in the currencies, the US has gone from the greatest creditor nation in history to the greatest debtor nation in history. Nations used to owe us money, now we owe more to other nations. How can we finance the debt? By selling bonds, notes of monies to be paid with interest along the way and the full amount in the future. Even though the US is deeply in debt, we are also known as the only somewhat predictable superpower that has a moral basis and holds out to the world what every person wants, in terms of personal and national hope, laws, accountability, stability, etc. As a result, our debtors are willing to be paid in cheaper dollars for many reasons., including using the inflated dollars to produce cheaper goods in their countries and sell to us as our imports. Thus, even while Japan and China have bought massive amounts of our debt through Treasury bonds, we buy their stuff, keep them in business, and they tolerate our weakening financial state. Foreign governments now own over half of the US through ownership of bonds, real estate and our businesses. If China and Japan alone wanted to bring us to our knees in one day, they could sell all their paper notes on the stock market in one day, which would be like a demand from a bank you pay your note in full that day on your house or they would take it from you and own it. Were they to do this, they would in the swoop of an ink pen or phone call accomplish without blood what a foreign army could only dream about. This same thought from a different angle is precisely why the international insurgents attack on the US is not just about the NY Twin Towers or US Foreign Embassies under attack. It is about destroying the US economically, because without commerce the country can not function any more than a household can function without adequate, steady, predictable income. Thus, the US is in a most precarious state, yet the respect of our great country around the world is so strong that our financial weaknesses are tolerated by them because the benefits on many other levels are so great. In the meantime, the US unspoken, unconfirmed policy seems to be to let the USD fall against the Euro and nearly every other currency in the world. Thus, the inflating of the dollar enables us to pay high bills with cheaper dollars. The bills, the interest, the laws are all paid and kept, even while the requirements are met by paper of less value. The trust, therefore, is the institution that pays, not just in the money itself. The assessor of value historically is in Gold. While gold in the USD has made rapid and alarming increase the last two years, and it now takes $436D to buy an ounce instead of $250D not long ago, gold in most currencies has gone down in their currency (due to their increasing value), unlike the dollar’s decreasing value. Thus, people buy gold, essentially not to make money buy to preserve the only historically authenticated and steady value which has held true for thousands of years no matter what the problem. When gold was $29 an ounce, it bought a suit of clothes, and today at $436 dollars it still does. In the meantime, the Euro/Dollar is only warming up, and the Dollar is likely to be allowed to fall much further in the immediate coming months and perhaps years. Others have a view different than mine espoused here, but you may factor it into the practicality of decisions we as American citizens as well as citizens of the heavenly Kingdom must always monitor. Please greet all the dear ones there in the Lord from us. Thanks, Richard, with Christine in Auckland, New Zealand.