Why The Government Wants A Weaker Dollar
As I stated in my last post, the government is bankrupting our economy. I asked Chuck Butler of Everbank.com “why is the government trying to weaken the dollar and if there was any advantage to having a weak dollar?”
He was gracious enough to answer my question:
It’s a political thing… If the Gov’t can show that they are doing what they can for Manufacturing, that equals votes. The main thing though is the dollar is used to attract foreign investment. I’ll explain.
The Gov’t is running a huge deficit, and as long as they are running a huge deficit, they are in need of foreign investment to finance that deficit. The amount of financing needed each day is over $2 Billion.
When a Gov’t needs to attract investment, they can do 1 of 2 things.
1. They can raise interest rates aggressively to attract investment, or…
2. they can allow a debasement of the currency, which acts as a clearing mechanism for investments. When a foreign entity buys a U.S. asset, they need to convert their currency for dollars… If dollars are cheap vis-a-vi the foreigner’s currency, they are in essence buying that asset at a discount.Given these two choices, a Gov’t will always choose #2… raising interest rates would bring an economy to its knees… so #2 is the always the choice… and that’s where we are today.
There you have it folks! Debasing the currency is always the better choice! I’m so glad I bought some gold. There also seems to be some evidence that foreign countries are finding the US dollar cheap enough to bring manufacturing jobs back to the US!
An added bonus to debasing the currency is that the 30 year bond, which pays less than the current rate of inflation, will be worthless in 30 years. In other words, the government will be repaying its debt with worthless currency. Suddenly the $57 Trillion of future debt obligations (Social Security and Medicaid) doesn’t seem so bad!
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February 4th, 2008 at 2:40 pm
Devaluing a currency and inflation are both methods that a government can use to pay bills incurred when a currency was worth more with a currency now worth less. Its a pretty good system (essentially printing money on demand) for a government that spends trillions of dollars. The savings are huge. Unfortunately the system works in reverse for anyone one building up savings in that currency. Where the government is saving money thanks to inflation and devaluation, every dollar saved by an investor is losing value.
February 5th, 2008 at 9:55 am
The devaluing of the U.S dollar also has some positive effects on for many of the large U.S multinationals. For example, 60% of 3M’s revenue comes from outside the U.S. Those earnings are inflated when they are repatriated for accounting purposes. Even if international sales remained flat the year over year revenue statements would show an increase in earnings.
ADI
http://americandividendinvestor.blogspot.com
February 13th, 2008 at 2:42 am
[…] OFF DIVIDENDS: Why The Government Wants A Weaker Dollar. Learn here how this will impact your investments and why it […]
February 14th, 2008 at 5:54 am
your article have enlightened my thinking of the weaken dollar!
February 19th, 2008 at 7:01 am
Carnival of Everything Finance: #13…
Welcome to the February 15, 2008 edition of Carnival of Everything Finance.
We had over 130 really good articles submitted for this edition. Unfortunately I could not include all of them.
Earning Money
poetloverrebelspy presents Claim Your Ref…..
March 11th, 2008 at 11:50 am
A weak currency is atractive for foriegn investment only if the investor believes it will stabalize or get stronger. What good does it do to buy at a good exchange rate just to sell at a worse one. and since income streams will be paid in dollars the future cash flows will be less and less when converted back to their currency. One must have faith in the base currency in order to buy assets of any given country. I beleive a stable currency incourages investment more than a weak one. Our dollar is in free fall. Even Americans are looking to Gold and Foriegn markets for protection. How does that encourage investmet?
June 5th, 2008 at 11:28 am
Great post. Now is the time to buy lots of gold.
June 28th, 2008 at 10:47 am
That statement about debasing the dollar is only partially correct.
The government doesn’t get enough money through taxes to subsidize all the programs it has. It can either borrow the remainder of the money from other countries. (Mainly China and Japan) Or print more money. Printing money of course dilutes existing money.
Why don’t they stop printing money? Because they can’t promise as much during elections
BTW, the government signed away the right to print money themselves, now they have the federal reserve do it for them, and they BORROW the newly printed money (with interest to the Federal Reserve). Where they of course eventually have to pay it back.
That brings me to the 2nd biggest reason they inflate. If you inflate a debt enough it will eventually be worth next to nothing and be easy to pay off. However the government is still in a never ending cycle of having to do so since they would have to borrow NEW money from the federal reserve with interest as well.
The current system is based on DEBT, which means if you pay off your debts money actually disappears from existence.
So even if the government raises taxes high enough to pay for all the excess spending (and thats not even possible anymore even taxing us 100% of our income) The excess money would disappear and the government would still only be left with the option to borrow from the Fed or other countries (with more interest) to continue to pay things off.
Yes this means they are in a hopeless situation. And this is why there are “doomsayers” warning people to get the hell out of the American dollar.
Honestly isn’t a very popular topic these days it seems.