Economists, who can always find something to worry about, are wringing their hands over the future of the dollar. It might lose value against other currencies. It might not continue to be the world’s chief reserve currency...
OK, that doesn’t sound very good. But is it really something that noneconomists should care about?
It especially makes sense to consider these hazzards when you think about investing and borrowing.
Any change in the dollar’s status can have ripple effects, though it can be hard to tell when the bad ripples outweigh the good ones.
Example? A weaker dollar means it takes more dollars to exchange for a given block of foreign currency, such as yen or euros. That makes foreign goods more expensive for American consumers. But it also means American goods are cheaper for foreigners, which is good for U.S. exporters, their employees and shareholders.
What Debt Does to the Dollar
Much of the current concern involves the U.S. government’s mushrooming debt, largely due to the financial crisis. On Aug. 23, the Obama administration said the government’s cumulative budget deficit will total $9 trillion over the next 10 years.
Warren Buffett, the legendary investor who heads Berkshire Hathaway Inc. (Stock Quote: BRK.A), has warned that debt-funded economic stimulus efforts that flood the country with cash can spur inflation. That undermines the value of bonds the government sells to cover the deficit.
Experts are also concerned that China and other countries may someday cut back their purchases of U.S. government securities, which they’ve long used to store excess cash. China, for example, might spend more of that cash to stimulate its own economy, and it could spread its investment of reserves among various other currencies.
Inflation and a weakened demand for U.S. bonds would undermine the dollar, since bond demand equates to dollar demand.