Re: Weak dollar - budget deficit relationship

quirk_at_syntac.net
Date: 12/26/04 

Date: 26 Dec 2004 13:04:30 -0800

Edward wrote:
> Hi,
>
> I was reading an article in the WSJ (Thurs, Dec. 2) a very verbose
article
> relating to a newly politically recognized relationship between
budget
> deficits and the weak dollar.
>
> Could one of you, in more simplistic terms, please explain how the
two are
> related today?

In principal. the Dollar is worth all the goods created by the economy
devided by the number of dollars in the economy.

When the Government Spends more than it Taxes, it is putting more
dollars into the economy than it is taking out of it, meaning that the
amount of dollars in the economy goes up, wile the amount of goods
remains the same, this contributes to what is known as the inflationary
gap. However, other things also contribute to the inflationary gap,
lending practices of Banks, for instance, and only all these things
taken as a whole can determine wether the dollar will go up or down.

However, I do not think that the Deficit is the major cause of the
collapsing dollar, rather it is the effect of the Euro pushing Dollars
out of foreign reserves, creating an over supply of dollars.
The dollar will be going farther down for a while yet.

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