The Sliding Dollar

Bonddad does a very nice job explaining the situation with the U.S. dollar here. His summary is very easy to understand:

Let's tie all of these ideas together.

1.) The US is increasingly dependent on foreign financing.

2.) At the time the US is more dependent on foreign financing, the dollar is at or near it's lowest point in more than 30 years.

3.) The Federal Reserve just lowered interest rates, making US assets less attractive to foreign investors.

4.) Number three leads to a decrease in value of all the US assets held abroad.

5.) Investors don't like holding assets that are dropping in value.

Pretty straighforward. What's that mean to you and me?

Here is a chart describing the current situation. As you can see the U.S., except for the brief period of time under Clinton, has been spending itself into oblivion with foreigners carrying the freight:


For the dollar to continue as the world's currency, and in the event that foreigners refuse to carry our debt, one of two things has to happen.

1. Deficits have to be eliminated via draconian spending cuts or tax increases.

2. Interest rates must and will rise to attract investors back to the U.S. (and strengthen the dollar).

The most likely of these scenarios is number 2. In this case, the U.S. then has an economy that, unlike the last 20 years or so, lumbers along dragging a weight behind it.