Friday, November 12, 2010

The Effect of the Stimulus on Foreign Trade.

The United States’ activity in stimulus financing is drawing sharp criticism from the Euro zone, China, Japan, and Brazil. What is it about U.S. stimulus money that is making our allies and business associates so uncomfortable? The money chain policies hold the answer:

1. In order to stimulate the economy and create jobs, the U.S. prints lots of money and spends it on projects that require jobs. This, theoretically, puts money for spending in the private sector into the pockets of the American people. (So far, almost a trillion dollars of spending has not produced much of a dent in the unemployment rate.)

2. With lots of dollar bills floating around, prices are predicted to go up in an inflationary response. So far, inflation is not going up very rapidly—1.4% per annum when last checked in September. However, the rate of inflation is bound to rise considerably with all the newly printed money in the economy. This inevitable inflation is what is worrying the leaders in other countries.

3. The large amount of money in the system will make each dollar worth less—at home and abroad. For that reason, Americans will not be able to buy international products as freely as before. That will cut into the sales for exporter counties, such as China, Japan, Germany, several other Euro countries, and Brazil. Neither Americans nor foreigners will be happy with that result.

4. American products will become more affordable to foreign buyers, because their currency will be worth more relative to the dollar value of our products. This would be a desirable thing for the U.S.

5. To compensate for the loss of U.S. sales, other countries will be tempted to print more money and thereby devalue their currency to support the sales of their products. (This is exactly what the U.S. is doing, now.)

6. This whole process is likely to produce a domino effect on world economies. Each country will try to devalue its currency just to keep up with the sales deficit they will experience when other countries cannot afford to buy their products.

7. Worldwide inflation will be detrimental to everyone in the end. Devaluing currency is only a temporary fix for a sick economy. The huge effect the U.S. has on other nations’ economies could tip the whole world into a dangerous situation. I think it is a bad idea.

In the long run, a free economy without the tough government regulations seems to me to be a better idea. The fix will be difficult for many in the short term; but free markets have performed better in the past; and I think they would perform better now.

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