Thursday, April 10, 2008

Dollar Alert

I posted on the decline of the dollar abroad a little while back and wanted to follow up on that. Today the dollar passed a historic mark as it fell under 7 RMB to the dollar for the very first time. One dollar is now worth approximately 6.996 RMB and the Yuan is expected to continue to gain on the dollar.

I recall seeing in the papers a month or two ago the White House unveiling plans for the fiscal year 2009 budget. The budget called for 3.1 trillion dollars of spending but did not anticipate taking in that much money in revenue (though if you are I were to forcibly collect "revenue" from our neighbors, it would almost certainly be called by a different name...). This staggering amount does not include the emergency spending bills that will continue to be passed to fund the ongoing war in Iraq. I remember a story of President Kennedy who set his budget at $99 billion because he refused to be the first president to pass the $100 billion mark. In just over four decades, the budget has increased thirtyfold.

What does this have to do with my post on the dollar? Simple, there are only two ways for a government to spend more money than it has at a given time, inflation and debt. Currently, China has bought up a large amount of our debt, which gives them some influence over our economy and politics (if they threaten to stop buying debt, we would have to find someone else willing to do so to sustain our current spending levels) and also means my generation and the next will be paying this off in the future with increased taxes. Inflation, a hidden tax, is the government printing extra dollar bills to make up for the shortfall in the budget. These extra dollars decrease the value of existing dollars and prices rise (inflation) at home and the dollar gets weaker abroad.

The good news, I'm up to nearly $572 a month. Unfortunately, prices here are only in RMB and China is also having troubles of its own with inflation...

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