3WOOD'S ECON 101 - 10/12

Dollar Reaches Breaking Point as Banks Shift Reserves

Oct. 12 (Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991. [Read on.]

You will notice in the third paragraph there is mention that this weak dollar is part of the plan for Obama. It's called a "Beggar Thy Neighbor" policy of trying to make your currency cheaper so international buyers import your goods instead of others.

The big problem with that policy is it's a bit like a restaurant intentionally putting out real bad food at a low price and thus try to attract customers that way. You are damaging yourself intentionally in the hopes of attracting more business.

I've never seen the wisdom of that.

Here's a different idea.

How's about we cut taxes on business, stop threatening business every day with more and more regulations, and let them try to focus on producing real good products and services here in the US at a reasonable price and attract business and grow the economy that way? Let's try that one for a while and see how it works. Business might even hire a few folks along the way and thus reduce the growing unemployment lines. And thus add to the tax revenue stream and reduce unemployment benefits being paid out.

Just a thought.