So the Fed is going to pour $200 billion into America’s faltering economy. That means 200 pieces of printed paper that you and I will accept as payment for goods and services. But what does a dollar really represent? America long ago abandoned the gold standard, so it is not equal to a set amount of gold – or anything else. It seems to me that the dollar represents faith. A dollar is worth something because we all believe it does.
Back in the old days economists wrestled with the problem of valuing money. Some suggested a unit of currency should be equivalent to a bushel of wheat, for example. For reasons beyond my grasp, that idea didn’t fly. Then came the gold standard. But, as I recall, Britain abandoned the gold standard after World War II, and other countries, including America, followed suit.
Now, I suspect that a group of immensely rich speculators manipulate the currencies of the world. A British politician called them “the Gnomes of Zurich” but I doubt that they all live in Switzerland. Of course governments also have a massive impact on the value of currencies. If China, for example, buys up a lot of dollars, the value of the dollar is likely to rise. If Saudi Arabia sells dollars and buys Euros, the dollar’s value is likely to fall and the Euro’s is likely to rise.
What’s the point of all this? I guess I’m trying to figure out how that extra $200 billion is likely to affect America’s economy – and the rest of the world’s. It has to create inflation, right? I mean if suddenly you have all this paper floating around without a corresponding increase in goods and services, it stands to reason that the goods and services will cost more. And, by the same reasoning, it has to have a negative impact on the dollar’s exchange rate. That means imported goods will cost more. And most of the things Americans buy these days are imported (including oil). Also, with credit loosening up, Americans will have the opportunity to get even deeper in debt.
So in the long run, the $200 billion will do nothing to make life better for the American consumer. It will most likely make things worse.
But that argument doesn’t faze my wife, Sandra.
“I just wish I had some of that paper,” she said wistfully.