The Future of the U.S. Dollar

The future of the U.S. Dollar

Saleem Chatoor

Studentnummer 0746775

Introduction

In recent years the U.S. public debt has taken an enormous leap towards extreme heights. The current total debt of the U.S. is considered to be unsustainable by many economists and politicians. At this moment the total debt of the U.S. is 80% of its GDP reaching to a staggering amount of 13 trillion dollars. Given the expenses and obligations taken to save the U.S. financial system this figure will only rise in the coming years.

It is my own belief that the debt of the U.S. will sooner or later result in economic default of the world's greatest super power. Thus the result on the U.S. dollar will inevitably be one of cataclysmic hyperinflation.

In this paper we will discuss what the causes are of the deficit, and what are its implications. Also we will look at the total debt of the U.S. and the economic measures the nation is taking regarding interest rates, the stimulus plan and quantitive easing. To conclude I will elaborate my opinion as to which future scenario is most likely.

Current circumstances

Current Account

Having a deficit does not necessarily lead to an unsustainable or problematic situation. Often after a war or economic recession a countries governmental spending exceed its income. Some economist (for instance Daniel Griswald, director of CATO, http://www.cato.org/pub_display.php?pub_id=4367) even believe it to be a sign of trust and strength of a country. They say "would you rather be a country that attracts money or a country which lends outside of its own economy". So in case of foreign investments having a deficits it's not considered at all to be an unhealthy situation.

So why is it such a hype in the world today. The U.S. just came out of a recession and also has been engaged with war against terrorism for quite a while. In a time of recession the private sector saves money and economist such as Paul Krugman believe that the government should spend in order to save the economy. The first and foremost reason for economists to get upset is the sheer size of the deficit. Every year since 1975 the current account has been colored with red ink and the last couple of years the deficits have sky rocketed to more than 800 billion dollars per year.

The current account of a country mainly contains of the difference between money flowing out from import minus money flowing in from export. Basically we can say that it is a cash flow statement of a country. As we all know the U.S. currently has a major deficit in its current account.

There are 4 main reasons of the U.S. trade deficit.

• The U.S. consumption

As we will discuss later on, the U.S. consumers have been stimulated to spend more money. By tax and lower interest rates consumption is stimulated, unfortunately for the U.S. there is a relatively a stronger yield between consumption and import.

• Decline of competitiveness

The U.S. is in a currency war with China, because it is losing ground on competitive prices. However here it must be noted that exports are rising and productivity of the U.S. is highest in the world. But the wages in U.S. simply cannot compete with the wages in other countries.

• Dollar relatively high with regard to the deficit

The U.S. have a high account deficit. When a country usually has a deficit the currency inflation rises. This happens because deficits are made securities so that other countries can buy them. Money is pumped into the economy. However the amount of goods and services produced in a country remain the same and that causes inflation. Although this is not a pleasant event, it brings balance to an economy and makes export cheap. In the case of U.S. the dollar is relatively strong and did not devaluate as much as assumed because of several reasons. (dollar safe heaven)

• Governmental spending

The U.S. government itself is spending huge sums of money on the war against terrorism. But also pension and healthcare cause the U.S. government to borrow money from other countries. Because of the recession the country has also launched two stimulus plans in order to jump-start the economy. However, mostly these stimulus plans have been paid indirectly by the FED (quantitative easing), and so do not really contribute