In January 2006 I wrote about the US Dollar and the major impact it has on setting US policy around the world (linking it to the Iraq situation). At the time I stated the US economy was way overvalued and the links in the blog include what might haven’t when people realise that they could trade in the euro. It’s interesting to see the Australian dollar among others making a very big move. The Canadian dollar is now worth more than the US and there is a remote chance this could happen to the AUD in the next 6 months. What does this mean? If it continues foreign governments (if they dare) will start selling down this losing asset, this will lead to further falls (a difficult cycle to get out of). As the US loses value so does its purchasing power, in the short term this means it costs more to buy overseas goods (but probably not from China since they link closely to the USD).
So the USA will be in the unusual situation of basic items costing more (i.e. inflation) at the same time as it economy is struggling (see sub-prime problem). Possible high inflation with raising higher unemployment is a terrible situation for their people and government. Normally you slash interest rates (which they have) to increase economic activity in bad economic times, but you don’t do it when you have raising inflation (as you overheat the economy). The chickens are coming home to roast. The Bush government, a so called conservative government, has run incredible deficits because he wanted to fund the ‘war on terror’ and at the same time offer tax cuts and also not cut services. This is as crazy as it gets, everything in life costs you. If the USA wants a war they need to fund it (leaving aside the obvious moral arguments) either by raising taxes, cutting services or both. It’s hard to feel sorry for them when they voted for this plan and especially since the wider world will suffer as well in the short-medium term (short-medium term starts at 4 years in economics not that most people think pass next week). I for one however will be happy that it is cheaper to travel to places using the USD in late 2009.
I’m not a big supporter of the current Australian Liberal Federal Government however at least they had the sense to not totally blow their good fortune (the resources bloom and economic reforms starting in mid-1980s) by running deficits. Australia’s major problem is in 4-5 years time paying for not investing in infrastructure for growth (especially human capital i.e. training/education) but the current government chose an option that is beyond their current term in office. How Bush thought it was a good economic choice to hurt his country economically in the immediate future I have no idea other than that they have no idea of very basic (year 10) economic theory (yet alone accounting/maths).