Declining Dollar And Economy

The news that came out on Thursday that the implied AAA Credit rating of the United States will eventually be downgraded. The dollar was hit hard again on Friday and that could have some serious implications when it comes to stabilizing our economy. What are implications of a weak American dollar. The first problem is high inflation and a perceived greater risk of holding the currency and dollar denoted assets. The greater perceived risk, investors will ask for a higher rate of return. This means that interest rates will be going up in America. The biggest problem is a significant exit of foreign capital from our markets. Therefore, can you imagine conversations between China, Japan and Russia the largest holders of our debt. The United States is forced to pay higher interest rates to attract capital, the economy slows as the cost of debt services increase. The Obama administration may want a weak dollar because it will help domestic production relative to our continued reliance on imports. Therefore, by generating some inflation is a means of devaluing our outstanding massive amount of debt. Whomever, is in debt currently can actually pay back those debts in future dollars that are worthless. Finally, we can stem the decline in the value of the dollar by increasing short term interest rates, that is, Federal Fund Rates currently sitting a 0-.25% will have to go higher. Higher rates means slowing down the economy. Although given the current economic turmoil, the Fed may have to increase the Federal Fund Rate even sooner than they desire and we could suffer through a nasty curse of STAGFLATION. The Obama Administration must find a credible way to protect the value of the dollar. This could be the first step in the downfall of America.