Question:
We
know that at the beginning of the Economic crisis in America the Dollar fell
significantly with respect to the Euro. However we noticed in recent days that
the value of the Dollar with respect to the Euro has risen, whilst the Economic
crisis is still at its peak in America. What has caused this rise given this
reality?
Answer:
As
you know paper currency is unbacked (by a commodity), it depends on the economy
of the state which issues it.
The
Global Economic Crisis began in America and the Dollar fell in value with
respect to other currencies. When the crisis reached Europe it effected
European economies and weakened the paper currencies in European states,
resulting in a relative increase in the Dollar.
To
understand this, assume that the Dollar equals to one Euro. When the crisis
began in America, the American Economy weakened and the dollar fell by say 20%,
so that it was worth 80% of a Euro, that is, one euro now equaled 1.25 dollars.
When the crisis extended to Europe, European economies weakened and their
currencies fell by say 10%, that is, one euro now equaled 1.125 dollars (90% x
1.25). The Dollar now equaled 88% of the Euro, which is as if it is had risen
from 80% to 88%, whilst in reality it had not risen at all in an absolute
assessment, but relative to the Euro it had risen, only because the latter has
declined.
It
is expected that the Dollar will return back down relative to the Euro,
particularly after the initial shock of the crisis in Europe is over and
measures are implemented to deal with the crisis. European economies are in a
better position to cope with the crisis than the American economy.
Thus
the rise is relative to the weakness of the economies of states. The greater
the impact of the crisis on an economy the more its currency will fall relative
to other currencies. The Crisis has affected many of the world's states. Thus
paper currencies have lost their value across the board, but relative to some
countries, currencies rise and fall depending on the effect of the crisis on
their economies. This volatile state will remain as long as the crisis is
effective.
Question:
The
Economic Crisis is still affecting the world as a whole. America has huge loans
on her which is owes to other states, China in particular. Is it not able to
print dollars and pay off its debts to China, or do the regulations of the IMF
prevent this?
Answer:
America
is able to print paper currency, with the consent of the IMF or without it.
America itself is the influential party in the IMF. However printing money in
such a manner leads to the decline of the value of the Dollar and, in turn, to
inflation, that is, the rise of prices. Hence America would not take such a
path, expect if she saw some another outweighing factor to do so.
For
example, it was reported that America printed between 2 - 4 trillion dollars
during the speculative oil boom in which oil price increased to almost $150 a barrel
and America itself was involved in this speculation. She printed this money in
order to be able to buy a larger volume of oil, directly or indirectly, and to
add it to her storage. In that she saw a benefit greater than the harm caused
by inflation. She stopped doing this as the Global Economic Crisis began to
deepen, as American markets could not bear more inflation due to the bankruptcy
of many companies, rising debt, and declining production and consumption.
It
is not possible for America now to print money without a greater economic
counterpart, and this situation is likely to persist in the foreseeable future.
However
the moment America sees a benefit for her in printing money without a counterweight,
she will do so, for she is the lone state which controls her currency by having
a large portion of it in the reserves of other states, in addition to the fact
that she has overriding influence in the IMF.
Therefore
it is not feasible at present for America to print money in order to pay off
her debts. This is for two reasons:
First: if she does
so the value of the currency will drop, because as the supply of the currency
increases (without economic counterpart) its value drops. In turn, the value of
the returned money will be lower, causing a problem between the debtor and
creditor. If the creditor is a big state like China then such a move will
effect economic relations between the two countries and will increase America's
economic crisis even further. America and Europe want China to work with them
to solve the crisis, not to abandon it.
Second:
an increase in the supply of paper money without economic return will lead to
an increase in prices within America, and American economic markets cannot
afford this.
Due
to these reasons it is not expected that America prints money without a greater
economic counterpart, at least in the foreseeable future.
However,
as we have said, the possibility is still existent. If America finds that there
is an overriding benefit for it, political or economic, she will do it on the
basis of the widespread American dollars in the reserves of other states and
using her influence in the IMF.
Or,
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