I have been under the impression that the government's inflationary policies would cause a devaluation of the dollar. This does not appear to be happening. Is it possible that it will not happen because other countries will continue to view the US economy as relatively stable, and so will continue to flee to our currency?
And if so, by simply building confidence in our economy, could the Keynesian policies end up succeeding in strengthening the economy by encouraging investment?
What you're describing is a bubble, and eventually that bubble will burst. What people think it is worth is not nearly as important as what it is really worth.
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The policies will not work. The dollar is doomed.
Always remember, there is always someone more stupid than you are. Strength in the dollar is relative to other currencies. So there are dumber folks in the world devaluing their currencies faster than the Federal Reserve Bank can devalue the dollar. The two responders were correct. This is temporary. There is no way that any supplier of stuff can keep up the pace with the decrease in the value of the US dollar. You are seeing this in the slow increase in the price of gold and some other commodities. Eventually this increase will gain momentum as the Fed and other central banks compete for the lowest purchasing power currency. Its a Weimar World!!!!!
How does one measure confidence? Try measuring your own confidence. It is not possible to know the level of one person's confidence let alone the confidence in the entire economy. I could equally make the claim that increased happiness will lead to a better economy by encouraging investment and it too would be invalid.
Most arguments by analysts who I've heard talk about confidence are fallacious. The prime fallacy commited is confusing cause and effect.
1. Low confidence and recessions coincide.
2. Therefore, low confidence causes recessions.
If the economy recovers, these same people will insist it is because confidence is higher. If the economy does not recover, they will insist that it is because the goverment has not done enough to increase confidence.
The economy will recover because of increased savings that lead to capital accumulation, not because of an increase in confidence.
See this article by George Reisman for more about the necessity of savings and capital accumulation for economic recovery.
The strength of the dollar since August 2008 might maybe depend on a credit crunch and increased bank "hoarding" of dollar in the face of suddenly increased default risks. It's natural that people want to hold more cash in times of greater uncertainty.
The trillion$ created by government have mostly been hoarded by banks (I've read) and other parts of them haven't yet been rolled out. When government starts spending the new trillion$, and when banks start ledning again, then we will see price inflation. There's a time lag here. Without any bank rescue trillion$, then prices might have fallen sharply (deflation due to credit crunch). So in that sense the new trillion$ have already had inflationary effect.
It's not fascism when the government does it.
“We must spend now as an investment for the future.” - President Obama