Printing more money causes monetary inflation. All you really get is price inflation. Unfortunately, nothing would change, except prices would increase. Think about it. Unlike paper money dollars, which can be printed out of thin air, gold does not lose value.
So by keeping a portion of your savings in gold, you offset the losses of your dollar being devalued. Thus every dollar printed by the US government would need to be backed by real gold held in the custody of the government.
This prevented the government from printing as many dollars as they wanted, and thereby decrease the purchasing power of the dollar.
Many other industrialized nations also switched from a system of fixed exchange rates to a system of floating rates. Since , exchange rates for most industrialized countries have floated, or fluctuated, according to the supply of and demand for different currencies in international markets.
An increase in the value of a currency is known as appreciation, and a decrease as depreciation. Some countries and some groups of countries, however, continue to use fixed exchange rates to help to achieve economic goals, such as price stability.
Under a fixed exchange rate system, only a decision by a country's government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures. Devaluation , the deliberate downward adjustment in the official exchange rate, reduces the currency's value; in contrast, a revaluation is an upward change in the currency's value.
For example, suppose a government has set 10 units of its currency equal to one dollar. To devalue, it might announce that from now on 20 of its currency units will be equal to one dollar.
This would make its currency half as expensive to Americans, and the U. To revalue, the government might change the rate from 10 units to one dollar to five units to one dollar; this would make the currency twice as expensive to Americans, and the dollar half as costly at home.
When a government devalues its currency, it is often because the interaction of market forces and policy decisions has made the currency's fixed exchange rate untenable.
In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate.
When a country is unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves.
China would like the yuan to replace the dollar as the world's reserve currency. Since then, China has been devaluing the yuan against the dollar.
It is doing so because its leaders are worried the economy is growing too slowly. The devaluation objective is largely accomplished via the continual purchase of U. Over half of the current account deficit is owed to foreign countries and hedge funds. The dollar strengthened during the recession , as investors sought a safe haven in comparison to other currencies. In March , the dollar resumed its decline thanks to the U. Creditor nations, like China and Japan, worry the U.
Why not? A weaker dollar means the deficit will not cost the government as much to pay back. Creditors have been changing their assets to other currencies over time to stem their losses. Many fear this could turn into a run on the dollar. That would erode the value of your U. There are seven steps you can take to protect yourself from inflation and a dollar decline. Some say the euro could replace the dollar as an international currency.
They point to the increase in euros held in foreign government reserves. But the facts don't support that theory. At the same time, U. Dollar holdings are That's only slightly less than the China is the second-largest foreign investor in dollars.
Treasury securities. China periodically hints it will reduce its holdings if the U. Instead, its holdings continue to increase. It buys Treasurys to keep the value of the yen low, so it can export more cheaply.
Many say the dollar won't collapse for four reasons. First, it's backed by the U. That makes it the premier global currency. Second, it's the universal medium of exchange. That's thanks to its sophisticated financial markets. The third reason is that most international contracts are priced in dollars. The fourth reason is probably the most important. The United States is the world's best customer. It's the largest export market for many countries.
Most of those countries have either adopted the dollar as their own currency. Others peg their own currency to the dollar. As a result, they have zero incentive to switch to another currency. Many in Congress want the dollar to decline because they believe it will help the U.
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