Question
Discuss the impact of dollar depreciation on the various aspects of American Economy.
Devaluation of the Dollar
Introduction: In most of the cases when the government devalues its currency it is due to the cumulative effect of all the existing market forces. If the country wants to sustain a fixed and stable exchange rate, it must contain a sufficient amount of foreign exchange reserves. The target of the government is to buy more foreign currency, which will eventually increase their foreign reserves. At a point when the country is purposely not doing the needful, it devaluates its currency in order to keep the currency at a desired level which will eventually support its foreign exchange reserves.
The major effects: The most important and key effect of this type of devaluation is that necessarily it makes the currency much cheaper when compared to the other countries. Now what does that mean? It means that the export made by the country becomes less expensive for the foreign countries. This will with certainty increase the amount of exports and on the contrary will discourage the importers. ("Currency devaluation and revaluation", 1999). This is due to the fact that dollar being more expensive, the importers will have to buy the goods by spending more amounts for the same quantity. Moreover the prices become high for the domestic consumers as well. Which means the overall business sector is relatively making lesser amount of profit. These are not at all encouraging signs for a particular economy as with lower consumer buying power and business sector declining the chances of unemployment increases. Though if we consider the macro-economic factors, it is quite evident that as the exports increases and imports decrease the trade deficit becomes less, but in actual that does not necessarily prove to be a important parameter for making the final judgment. ("Currency devaluation and revaluation", 1999). It has to be remembered that the actual exports are not increasing in amount, but it is the currency value which has actually decreased. Also if we see the America is no longer dependent upon its manufacturing industry. Rather the country is now more concentrated on its import industry. For that reason it becomes even more difficult for the government to adapt such a policy which actually affects the industry which contributes to the Gross Domestic Product, to a great extent. If imports of America fall the entire economy is bound to suffer the turmoil.
There is another major threat as far as the country's economy is concerned. The devaluation policy adapted by the government in many cases encourages inflation. The stage is so critical that the economy of United States has gone into inflammatory recession. ("Hyperinflation Special Report", 2009). This may particularly lead to a great depression for the particular economy. Most of the sovereign states are bankrupted and for that reason the states have the only option to print new currency, which ultimately leads to devaluation of dollars. ("Hyperinflation Special Report", 2009). The problem does not stop here as this creation of excess currency will result in the huge amounts of new fiat dollars. These are the currencies which are not backed by any assets like gold. ("Hyperinflation Special Report", 2009). Like a chain system its will pull down the financial markets of the dollar-denominated papers. This hyperinflation is a major risk factor. Not only for the domestic consumers but also for the people who are earring fixed amount of income. The actual value of money now being less, it decreases the actual amount of income. That means the retiree will have actually lesser amount of money in his or her hand to buy the goods. This condition actually imposes a great challenge for the people who have limited income, given that the price is rising at drastic pace side by side.
Taking a psychological point of view when in the global stage, when the currency of a particular country is decreasing it necessarily reveals the economic weakness of the country. This hampers its creditworthiness in the global stage and the foreign investor loses faith in the economy. The trade partners will also lose faith. It may also happen that oil producers shift their preference from the dollar to the Euro or Wan. In that case crude oil will become all the more expensive for the nation. As long as the oil sector is valued against the currency of The United States of America certainly holds some advantage. But the speed at which dollar is devaluating it is quite likely that the oil producers may shift their choice of currency.
Effect on the economy of South Florida: An economic survey conducted in the region reveals that there is a constant growth of unemployment and it has reached a figure around 10.6 percent. ("Florida confidence in the economy slips", 2009). This figure eventually has dropped the confidence of the consumers to sixty seven. Along this expectations of personal finances also fell by three points to forty three. ("Florida confidence in the economy slips", 2009). Also as the main economic strength of the state is its exports, on paper it recorded percentage growth but the consumer market fell to a large extent. The cumulative affect of the downturn of the real estate market, the increasing number of foreclosures along with devaluating dollars has given rise to tremendous unemployment in the state. With people almost having no valuable income in their hand in the year 2008 the foreclosures began to boost up and eventually the credit market almost closed down. ("South Florida's Economy Under Water", 2009). According to most of the experts the home prices in South Florida will continue to fall down, but not at that speed as it was in the year 2008. the record shows that many institutes in Florida have applied for federal bailouts. But as the federal government is adapting a policy of floating more currency in the market, the situation now looks worse. The institutions do not realize that they are actually receiving a devalued amount of currency which will only fulfill a portion of their entire need.
Conclusion:
Thus we see that the policy adapted by the government is not sufficient to combat the situation as it is fueling to the problem and driving the country towards an economic disaster. On the other hand if the country would have adapted a fiscal policy long term benefits could have realized. The government of United States should now concentrate on repaying back the debts that it has so that its position is revived in the global economy and in that way the currency would retain its proper status.