A weak dollar means you might not notice your investments and income are declining in real value in terms of relative spending power over a matter of years. That is, unless your investments are denominated in ounces of gold or an asset with historically stable value.
The value of the dollar has declined so much that $100.00 around the year of U.S. independence would be the relative equivalent to approximately $2,500-$2600 between 2009-2010. This means the cost of living, as measured by the Consumer Price Index (CPI) has risen 2550% in about 236 years.
Inflation isn't always a bad thing however, especially when the Gross Domestic Product (GDP) is increasing. When Gross Domestic Product rises, which it has in much of U.S. history money needs to be created to match the productive and innovative wealth of the nation.
According to the Federal Reserve Bank of Minneapolis, inflation is estimated to be 2.4 percent for 2010. However, if average income for the same year does not also rise 2.4 percent, spending power and household net worth also declines. This means the same amount of dollars buy less, and for example imported goods rise in price.
If national wealth in terms of goods and services increases and money supply stays the same, the value of money should rise to account for a rise in what it represents i.e. less money would buy more. If GDP declines, and inflation is present the value of the dollar experiences two negative influences on value, hurting household wealth.
Since economic stability is vital to the most optimal functioning of a nation, allowing investment inflation has several potential benefits including higher profit margins for corporations paid in foreign currency, increased consumer spending, stimulus for business investing and possibly hiring thereafter.
In the above sense, a weaker dollar can help encourage exports and foreign investment into the country. With this, the hope is additional economic stimulus will be infused into an economy thereafter bolstering productivity, employment and wealth.
If a decline in the dollar does not lead to additional economic stimulus, a situation like that of the Weimar Republic in the early 20th century can potentially occur, but that's a worst case scenario. Nevertheless, Just as the price of gold increased during the Weimar Republic, so too has the price of Gold in U.S. Dollars.
The results of a declining dollar have yet to be seen. If it's an economic gamble on the part of the Federal Reserve Bank, and that gamble turns sour, it may cause an economic contraction in terms of a declining national net worth. On the other hand, if the quantitative easing is effective, then federal tax receipts might increase and economic expansion may fruit new wealth.
The value of the dollar has declined so much that $100.00 around the year of U.S. independence would be the relative equivalent to approximately $2,500-$2600 between 2009-2010. This means the cost of living, as measured by the Consumer Price Index (CPI) has risen 2550% in about 236 years.
Inflation isn't always a bad thing however, especially when the Gross Domestic Product (GDP) is increasing. When Gross Domestic Product rises, which it has in much of U.S. history money needs to be created to match the productive and innovative wealth of the nation.
According to the Federal Reserve Bank of Minneapolis, inflation is estimated to be 2.4 percent for 2010. However, if average income for the same year does not also rise 2.4 percent, spending power and household net worth also declines. This means the same amount of dollars buy less, and for example imported goods rise in price.
If national wealth in terms of goods and services increases and money supply stays the same, the value of money should rise to account for a rise in what it represents i.e. less money would buy more. If GDP declines, and inflation is present the value of the dollar experiences two negative influences on value, hurting household wealth.
Since economic stability is vital to the most optimal functioning of a nation, allowing investment inflation has several potential benefits including higher profit margins for corporations paid in foreign currency, increased consumer spending, stimulus for business investing and possibly hiring thereafter.
In the above sense, a weaker dollar can help encourage exports and foreign investment into the country. With this, the hope is additional economic stimulus will be infused into an economy thereafter bolstering productivity, employment and wealth.
If a decline in the dollar does not lead to additional economic stimulus, a situation like that of the Weimar Republic in the early 20th century can potentially occur, but that's a worst case scenario. Nevertheless, Just as the price of gold increased during the Weimar Republic, so too has the price of Gold in U.S. Dollars.
The results of a declining dollar have yet to be seen. If it's an economic gamble on the part of the Federal Reserve Bank, and that gamble turns sour, it may cause an economic contraction in terms of a declining national net worth. On the other hand, if the quantitative easing is effective, then federal tax receipts might increase and economic expansion may fruit new wealth.
Sources:
1. http://bit.ly/cQEfEA (Minneapolis Federal Reserve Bank)
2. http://bit.ly/bkbTmo (Measuring Worth)
3. http://to.pbs.org/cmHt7E (PBS)
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