The US Dollar

The US economy is terribly out of whack. It is projected to run a trade deficit of $1.4 trillion for the fiscal year starting 1 October 2009. This will be about 10% of its GDP. The total US debt at the end of 2008 was $10.7 trillion. Half of this was incurred in the last 10 years. This huge deficit has resulted in the accumulation of vast amounts of dollars in foreign bank accounts. To keep the liquidity level at home, they have to print more dollars.

The financial crisis has retarded the economic growth. To stimulate the economy and at the same time to forestall severe deflation, the government resorted to massive spending. To finance that, they embark on the printing of new dollars.

With all the new notes printed, the assets backing backing each dollar is diluted. Economic theory tells us that the US dollars should be weaker. Indeed, it has weakened slightly this year. However, because of the safe haven status of the US, foreign nations are still buying US Treasuries. This gives the dollar support and help props up its value.

The problem of the dollar will start when the Japanese and the Chinese loose faith of the currency. When they start selling their treasuries holding, the dollar is expected to decline inexorably. The dollar will then be no more mighty.