This past weekend, the G-20 Finance Ministers pledged to stop the currency wars, primarily between China and the U.S., that threatens worldwide inflation in food, oil prices and other commodities. The result? Treasury Secretary Tim Geithner pledged that the U.S. would not flood the market with Treasuries, driving down the value of the dollar, while emerging markets agreed to let the forex market determine their currency values (i.e., let them rise, if necessary). So, why did this drive the dollar down, anyway, and the stock market up?
First, forex traders were hoping for a more solid pledge by the U.S. and China to keep their currencies strong. They anticipate that the Federal Reserve will continue buying more Treasuries, to keep interest rates low. However, this means an expansion of the money supply, which lowers the dollar. It is a shell game that fools no one, but it is a desperate attempt by the Fed to use monetary policy to offset irresponsible fiscal policy.
Forex traders sold dollars, driving its value down .66% against a basked of currencies. In response, the Dow rose one percent - a falling dollar value makes U.S. stocks cheaper to foreigners. For an example of how this works, last Wednesday a 1,000 euros could buy $1,370 in stocks. This morning, that same 1,000 euros could buy $1,405 in stocks.
Here's another amazing thing - members agreed to transfer 6% of voting power in the International Montary Fund (IMF) to emerging market countries, another shift in the balance of global economic power away from the old G-7 developed countries. (Source: Reuters)
What It Means to You
As the value of the dollar declines relative to other currencies, the prices of imports will rise. We have already seen an . On the other hand, it is lowering the price of U.S. exports, which should help economic growth. It also makes the U.S. stock market a good deal, which is one reason the Dow has broken above 11,000 lately. And, as long as China keeps buying Treasuries to keep the yuan low, mortgage interest rates will stay low. (For an explanation of this, see Relationship Between Treasury Notes and Mortgage Interest Rates)
To stop the insanity, make sure you Demand a Balanced Budget When You Vote.
What should you do? Buy local. This does two good things. First, it keeps your prices the same, since the products are produced and sold in the dollar. Second, it creates more jobs - something we do need right now.
Related Articles
- Learn More About Why and How the U.S. and China are Engaging in a Currency War
- July 2010 G-20 Focused on Debt Reduction
- 2009 G-20 Threw Funds to Shorten Recession
(Credit: John Moore / Getty Images)
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