Will the $700 Billion Bailout Help the U.S. Dollar?

Miranda Marquit — Mon, 29 Sep 2008 15:50:48 +0000

I have a few people that email me every now and again wondering about the state of the U.S. dollar. These are folks that are interested in it for investing purposes, because they expect to travel overseas in the next year or so, or are just concerned about the dollar’s standing in the world.

Lately, I’ve been getting questions about how the $700 billion bailout is likely to affect the U.S. dollar. In the near term, the bailout has been helpful, since the dollar has been rallying on the assumption that the economy is likely to recover as a result of this measure. But the Forex Blog is not so sanguine, and warns about taking things right now at face value:

The consensus- unchanged from when the plan was first unveiled- is strongly negative, especially as far as the Dollar is concerned. When combined with the government’s other initiatives, the bailout will add nearly $1 Trillion to America’s national debt. Additionally, the Federal Reserve Bank would have to print money to bridge a shortfall in the government’s borrowings, thereby stoking the fires of inflation. Ironically, the Dollar’s best chance to avoid a continued decline is if the bailout plan fails in its stated aim, and the American economy implodes, pulling the global economy down with it.

I found this a very interesting analysis. But it seems in line with everything else about this bailout and with efforts at “economic stimulus.” Everything done so far seems to have little value beyond the surface, and does little to promote long-term stability and prosperity.