There has been a lot of talk in the news & media about the potential of dollar devaluation.
Arguments in favor of devaluation:
- Economics professor Barry Eichengreen said it would be devalued 20% over the next ten years
- China’s Yuan is undervalued by 40% and needs to go up to ease their inflation problem
- The goal of the Federal Reserve is to devalue the dollar to stimulate a new bubble to get out of the housing slump
- The U.S Treasury debt is so huge that devaluation is needed to make it easier to pay off the debt
Arguments against devaluation:
- Other nations would have competitive devaluations because of their need to generate exports, thus no net devaluation would occur
- China would insist that the dollar not be devalued because they don’t want their gigantic holding of T-Bills to be devalued.
- Other nations, including China and the Euro zone, also have problems and are no better than the U.S. so there is no other large country for capital to flee to as part of a capital flight from the dollar. Even the currencies of Canada and Australia country go down in value when the commodities boom ends
- The governments of the world depend on continuing trust in fiat money as opposed to the public losing trust and fleeing to ownership of physical gold buried in people’s backyards. Thus all governments have a vested interest in coordinated policies to stop one nation from a huge devaluation.
- Devaluation would make it harder for the U.S. Treasury to issue more debt; it frequently rolls over short term T-Bills with new issues of T-Bills, so it must not offend foreign creditors with a devaluation
- The track record of the dollar has been about a 0.8% annual average drop in value since 1971 when it was allowed to float. This is far less than the typical 2% annual inflation rate.
I remember reading a book in the 1970’s by gold bug Harry Brown where he advocated investing in the Lebanese pound because it had the largest percentage of gold backing by its Central Bank. Unfortunately Lebanon soon suffered a devastating civil war followed by a foreign invasion, so the currency was damaged.