does the american consumer debt weaken the dollar? (not national debt, but the debt in american households)?

Question

if it does weaken the dollar...why? and how?

Answer 1

It does not directly weaken the dollar. However, high levels of consumer debt (totalled as a percentage of GDP) can cause a lack of faith in the US economy overall and THAT would weaken the dollar. So far, this has not happened.

The reason is that the relative strength of the dollar is based less on the power of the central bank (Federal Reserve system) and more to do with the relative supply and demand for US dollars. The demand for dollars is based on the stability and growth potential of the US economy as a whole. If that stability and growth potential were damaged by the level of consumer debt, then the value of the dollar relative to other currency would decline.

Answer 2

by using having to spend over $4 hundred billion of the tax sales for pastime in this debt each and every 3 hundred and sixty 5 days. it form of feels maximum human beings are comfortable with spending greater advantageous than they make and don't see how large of a topic it is.

Answer 3

Not sure if I can bring much new info to the debate, but here is an interesting article about the dolar;

http://www.msnbc.msn.com/id/17424874/

Is growing foreign investment in the U.S. bad for America?


Does this help any?

Answer 4

The answer is determined in the currency markets, and it depends in part on who is financing the deficit spending.

The most common reason cited for why consumer debt should cause a weakening of the dollar is that there is a higher risk of default. This is a somewhat contrived result and requires a line of reasoning as follows:
a) Consumer debt increases, leading to more defaults
b) Default involves losses for financial companies underwriting the debt.
c) The losses can lead to decreases in activity and economic output
d) The loss of output means dollar-denominated securities will drop in price based on market expectations (ie, U.S. companies will perform poorly in the stock markets, leading to a flight from U.S. assets to foreign assets by investors).

The above mechanism does exist, but it is not by any means the bulk of the story - especially considering that most "purchases" of U.S. dollars from foreign currencies have nothing to do with the stock market, but rather to facilitate international trade.

Strictly speaking, U.S. consumer deficits (spending in excess of income) should STRENGTHEN the dollar because consumers are demanding more of them to make their purchases, at least when they are of dollar-denominated goods (ie, domestic goods and services). However, you're asking about U.S. consumer debts (funds owed other parties, whether the consumer's balance sheets make that debt necessary or not), which is another story and requires examination of why that debt is occuring and whether it is growing or shrinking.

The portion of consumer debt that is financed by other U.S. entities and involves purchases of domestic goods and services should have no impact on the relative strength of the dollar because the dollar is not being traded against any other currencies in order to make these transactions occur (since a "weaker" dollar means a dollar whose exchange ratio with foreign currencies falls).

The portion of consumer debt that is financed by FOREIGN financiers (ie, overseas banks, Chinese purchases of Treasury securities, etc) for domestic purchases may have an impact in that it requires the purchasing of dollar-denominated assets (T-bills, stock, etc.) out of foreign nation's dollar reserves, which increases the supply of dollars on the market, which ceteris paribus reduces the 'price' (exchange rate) of the dollar, making it 'weaker'.

It is entirely another matter if U.S. consumer debt is predicated upon the consumption of imported goods - regardles of financial source. Foreign goods cannot be purchased with U.S. dollars (strictly speaking, these goods are bought using foreign currencies by import/export firms in the U.S., and sold in the U.S. in dollar-denominated prices), and so require the exchange of U.S. dollars for foreign goods.

"Selling" U.S. dollars for foreign currency involves two processes:
1) Increasing the supply of U.S. dollars on teh currency exchange markets.
2) Increasing the demand for the foreign currency relative to teh U.S. dollar.

Combined, these two processes serve, via market forces, to reduce the relative value of the U.S. dollar to that foreign currency, something commonly referred to by the media as a "weakening" of the dollar.

Note that there are MANY other factors at play in why the dollar would be weaker:
1) A higher demand for foreign goods to the detriment of U.S. goods by foreign consumers
2) A favortism for Euros (where many Europeans, when the Euro was introduced, didn't trust it)
3) A favortism for investment elsewhere besides the U.S.
4) Decreased perceptions of weakness in non-U.S. currencies (the dollar is often seen as a haven from unstable currencies; this is why so many T-bill owners are foreign businesspersons in 3rd world nations)
5) Perceptions of relatively higher inflation in the U.S. (though this is indirect, since higher inflation is seen to erode the value of securities and reduce purchasing power, and so a weakening of the dollar in response to inflation invokes the existence of a sell-off mentality in the markets, which won't happen just because the dollar is sliding)