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Economic Myths Debunked Debunked V

Penultimate Myth from Mother Jones:

Myth #5 Obama is Debasing the Dollar

There’s just no basis to the claim that Obama has debased the currency. And that’s unfortunate. As economist Dean Baker is fond of pointing out, if we want to get our national savings rate up and our long-term budget deficit down, there’s only one way to do it: by fixing our massive trade deficit. We have to import less and export more, and one way to make that happen is with a weaker dollar. A weaker dollar makes foreign goods more expensive, so we’ll buy less of them, and makes American goods cheaper, so others will buy more of them.

There are two arguments here, firstly, that the dollar has not been debased, and secondly, that our currency should be debased to make our manufactured goods more attractive internationally.

Money supply is a very complicated subject and one I really don’t want to tackle in this series. There are arguments for and against a weakening American dollar. The primary argument for a debased dollar stems from an increase in m1, m2 and/or currency supplies, as measured by the fed (which could be meaningless, or not) and the huge increase in gold, silver, wheat, corn, copper and other commodity prices. It appears the US Dollar has lost some ground (i.e. been debased) and it is likely the result of the Fed’s quantitative easing.

However, should the US be actively debasing the Dollar? To explain exactly what is going on here, I suggest going through the Khan Academy Currency playlist that should illuminate the subject a bit better. The primary point I would want to make here about purposefully debasing your currency to support your manufacturing sector is: there is no free lunch.

Destroying your currency helps manufacturers, but it hurts everyone else. Wealth is basically stolen. Everyday, the currency in your pocket will be able to buy fewer and fewer goods. All of the evils of inflation eventually surface. It’s even possible world banks will turn away from using the Dollar as a reserve currency. It’s not something you should take lightly. There’s a lot of hubris at work in even suggesting the road to prosperity starts with a weakening dollar, and a weakened dollar is something that might have contributed to the premature end of several presidencies since Nixon decoupled the dollar from gold.

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