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by ... on May 19th, 2007

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I'm no economist so can someone explain why America can have a lower valued currency than the British Pound or Euro if we are supposed to have one of the highest Gross National Products and considered one of the wealthier nations?

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  • by Im Alec has abandoned this account on May 19th, 2007

    Im Alec has abandoned this account

    The actual value of the currency unit is essentially irrelevant. It would be perfectly possible to have a larger currency unit by simply dividing the dollar by ten: every old dollar becomes ten new cents. At a stroke the US would have the largest currency unit int the world - and nothing would have changed. Multiplying or dividing both sides of the equation by the same number changes nothing.

    The real question is not why the dollar is worth less than the pound - it always has been, but there have been a *lot* more dollars around for the last hundred years. It is why is the dollar falling. And the simple answer is that America is spending more than it is earning. It is buying lots of Gizmos from the Far East. Which is fine, provided you sell something back - and it is that which has stopped. Instead, the US is spending a lot on defence, a lot on Farm Support, and so on. But it is not levying the taxes to pay for it. Since people are not paying the money in tax, they spend it instead - in many cases, on imported Gizmos. So the foreigners are piling up lots of dollars, and theink they are worth less because of it.

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  • by Persky Bunkermeister on May 19th, 2007

    Persky Bunkermeister

    This is my understanding: it has to do with supply and demand... less people want American dollars, so the exchange rate goes down. The next question is, why do less people want American dollars? There are many considerations -- debt is one of them, (America is incurring a humongous debt on Iraq right now) -- price of oil (America is a huge importer) -- trade balance -- America imports more than it exports. USA has to borrow to pay debt, and it has to buy foreign currency to pay for imports, these things and many more contribute to weaken the dollar.

    Long story short -- if USA got out of debt, became more self reliant on energy, and focused on a better balance of trade, the dollar would get stronger, because our demand for foreign currencies would go down.

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