Wednesday, October 21, 2009

Some thoughts on our current economic situation.

The actions of the Obama administration, and the last gasp of the Bush administration, have resulted in potentially irreversible damage to the status and value of the US dollar. Even if the amount of cash released wasn't really that significant (and I think it was), by demonstrating that our government is willing to devalue the currency, we have ruined the confidence the dollar once enjoyed. Banks around the world are seriously considering, if not already switching, changing their reserves over to other currencies or gold. When doing so they sell their dollars, which will further exacerbate the lack of confidence.

The exact effects of this inflation may be more difficult to plot, thanks to the majority of this money being trapped outside the country, a condition that is largely their own fault: What will they buy with those dollars? Our production capacity has fallen drastically, with most production happening overseas. What's left is meant for the US market and is largely unsuitable for export, with a lot of effort required for conversion. The service industry isn't readily exportable. Automobiles? Don't make me laugh. Real estate? Foreign investors already own large amounts of US real estate; and that real estate rents for MORE DOLLARS, just what they need. Wheat? What, MORE wheat? Much of the rest of US food production is in perishables which aren't readily exportable.

Domestic inflation is more closely tied to oil prices, what with our use of petroleum for fuel, fertilizer and plastic. Oil producers are stuck; they've pushed prices as high as they could without sharply curtailing demand, and even if the dollars aren't very desirable, they'd rather have that cash than nothing. In this sense we're better off than when OPEC was boycotting the US and reducing supply during the Carter administration, which caused that high inflation here in the US.

In my opinion, what we will see is a devaluation of the US dollar with regard to foreign currencies, inflation in everything except base foodstuffs, and reduced imports. Long-term effects will possibly see more domestic manufacturing, which is good, but will also see some of our food production shift to exportables. The US was a rich country, richness being a measure of experience; we will be poorer in the years to come.

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