Dollar Weakens, Gold Up in Europe - New York Times

Dollar Weakens, Gold Up in Europe - New York Times

The Bush Administration would be remembered for its legacy of do-nothing government. Since coming into the power, Mr. Bush has been busy in promoting his ideological beliefs than doing the things for the common good of average Americans. There has been a total disconnect between the Main Street America and the Bush policy makers. I can give many examples to prove my point but I would like to keep this discussion confined to the current state of American dollar. However, one good example of Bush Administration’s loss of contact with people was obvious when Hurricane Katrina hit several states on the Gulf Coast on Aug. 29, 2005.

The falling value of American dollar should be a matter of great concern for all of us. It is not clear if the Bush Administration wants a stronger or weaker dollar. I am not sure if there are many things out there that Bush Administration can do to stabilize American dollar. We have been living under two assumptions i.e., (i) we have unlimited financial resources, and (ii) our financial strength is such that no other economy or a group of economies can ever get ahead of us. We are strong proponents of free markets. We don’t realize that there is no such thing as a “pure” free market unless every country in the world becomes a 100% free market economy. You got to adjust your policies in a way that matches the interests of your country both in the short and the long term.

We are counting on China to appreciate Chinese yuan so that American dollar can become weaker vis-à-vis Chinese yuan. The result would be increased costs of American imports in terms if American dollars. American consumers will have to pay more for their purchases. My gut feeling is that this action may worsen inflationary pressures on the American economy. Increasing prices of American imports from China may also decrease the demand for the good produced in China. For all technical purposes, it is safe to assume that Chinese may find it necessary to reduce their American dollar holdings in U.S. bond market if the demand for Chinese goods slides. In that case, I suspect that the increased pressure on the U.S. bond market would move the interest rates higher.

There can be no dispute that having an indifferent approach to the value of American dollar is NOT the best policy. Weaker American dollar reduces America’s buying power for international acquisitions and mergers. A weaker American dollar will definitely give more power to foreign companies. If American consumers’ buying power is significantly reduced, it would have devastating impact on domestic companies’ bottom line. As a country we need to shift away from the “borrow and spend” method of living our lives both at the personal level and at the national level. We got to bring fiscal discipline if we want to control our future standard of living. The financial success and prosperity of the future generations depends on our fiscal discipline.

I personally don’t think that the Federal Reserve can do too much to bring about a significant change in the way we handle our economic policies or our discussions regarding falling decline in dollar’s value. The members of the Federal Reserve are the bosses of money supply. They have no control over how American economy fits in the global picture and the actual behavior of American consumers and businesses. I take a very grim view of how American policy makers have handled our economic and fiscal policies in the recent years. We need to take immediate steps to strengthen American dollar if we want to maintain our way of life, innovation, entrepreneurship, competitiveness and standard of living. We need to control our Budget spending and government subsidies.

I am very concerned about the future of mortgage market in the U.S. The situation is still unfolding. We would not know the real impact till mid 2008 when many ARMs will become fully indexed and monthly mortgage payments will go up for some American consumers.

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