If true, this almost certainly means the long-expected “realignment” of the dollar is beginning. And this means the United States, and everyone in it, is going to have to reduce their borrowing.
We have been running a huge trade deficit, which accumulates. We buy more stuff than we sell, so the rest of the world keeps receiving more and more dollars. They are not sending the dollars back to us by buying things we make. When you have a whole lot of something the way you get rid of it is to lower its price. Because we have been borrowing to buy things from the rest of the world, the rest of the world has a whole, whole lot of dollars. And when you hear about the dollar “dropping” it means that others are lowering its price. Where they were selling dollar for a Euro a couple of years ago, now they’re selling them for .77 Euros each. And still no one has been buying, so in a few weeks they’ll be trying maybe half a Euro each.
What does this mean? It means everything that we import is going to cost a lot more. Things that cost a Euro before will cost two. Take a look at everything in your house that is made in China or somewhere like that, and think about that. But it also means everything we make will be in demand, which means more jobs – after a while.
But there’s something else it means. Trade is not the only place we have a deficit. We also borrow hundreds of billions of dollars every year to run our government. THAT is where those extra dollars have been going — they have been loaning them back to us. And now they are not going to be so inclined to do that. And that means that the government has two choices. One is to stop borrowing so much money. The other is to offer enough incentive that people will continue to loan them money. Incentive in this case means interest rates, and that means the end of the housing bubble and of easy credit and a lot of other things.
Cutting the deficit means raising taxes and/or cutting spending. There is a lot of room to raise taxes at the top – Clinton did this and it led to years of prosperity – but very little room to raise them on anyone else. And there is a fat chance less than zero of THIS government raising taxes on the rich! So that means cutting spending. There is even less of a fat chance that they will cut military spending, so it means cutting health care, education, criminal justice — there just isn’t much money outside of military spending so it’s all going to be cut deeply…
If China and others really are finally ready to let the price of the dollar drop, it means big changes in store of all of us. The public does not realize the extent to which our standard of living has depended on our borrowing. And our borrowing might just be about to hit a wall.