Citation
Kritzer, Adam. (2009, February 10). Is the Fed Hurting the Dollar in the Long-Term. CurrencyTrading.net. http://www.currencytrading.net/2009/is-the-fed-hurting-the-dollar-in-the-long-term/
Purpose
The purpose of this article was to examine how recent Federal Reserve and US Treasury Department actions to stimulate the economy may have an impact on the long-term value of the US dollar.
Summary
Due to the severe downturn in the US economy, policymakers and analysts have taken to debating the efficacy of various programs the government has created to address the crisis. However, these debates have focused on short-term goals, such as stimulating the economy, improving credit flow to businesses and consumers, creating jobs, and increasing benefits to those out of work. The long-term effects of these programs and stimulus packages on the value of the US dollar is a topic that has not been addressed nearly as much.In fact, since the crisis began, the Federal Reserve has been inflating the money supply by creating various new programs, discount windows, action facilities, and buying mortgage backed securities. But these have not stimulated spending, as consumers are saving more, creating the threat of deflation. Growing the money supply while confidence is being lost in the dollar may lead to a complete collapse of the currency and an inflationary depression.
Foreign countries, of course, have noticed the actions that the Fed and the Treasury have taken and have begun to shift away from the dollar as reserve currency of the world. While the dollar still remains the reserve, holdings of Euros have increased, and some countries that pegged their own currencies to the dollar have abandoned that peg as being too costly. China has also decreased the amount of dollars that it holds from 70% to 45% of its total reserves.
Conclusions
Essentially, the US government is relying on an assumption that creating vast sums of new money will not lead to large increases in prices down the line. The stimulus packages and attempts to paper over losses at banks, it is hoped, will have some other result than inflation or hyperinflation. Through low interest rate policies, the Fed is also hoping that it can fight deflation and encourage consumers and businesses to begin borrowing money and spending again. But this devaluation of the dollar in order to save the US economy may have grave impacts on the role of the dollar as reserve currency of the world. Other countries are already looking for a replacement for the dollar, or at least additional options to hedge their bets against the US defaulting on its debt and the destruction of the dollar.