Quote from Algorithm:
Would it not be "smart" to just keep printing "worthless paper" if other countries are happy to exchange boatloads of goods and services for them?
Now, if those countries (our trading partners) suddenly realize that, "hey all this crap is just paper not worth the paper its printed on" and decide to stop manipulating their currencies and protecting their markets, then the dollar drops. Trade deficits start to diminish and all of a sudden you got Chinese driving Hummers, listening to Ipods, smoking Marlboros and popping Viagra. Not very bad is it? Of course Americans would have to pull in their spending habits, skip a vacation abroad or two, but eventually our trade deficits would be in sharp decline and our currency would start to strengthen.
You see many people throughout the world would rather hold dollars than any other currency regardless of their rates of return due to one fact, they believe that the U.S. will still be here!
You think that if the Chinese let their currency float and markets decide its value rather than manipulating it, the populous wouldn't revolt? The Chinese have to make sure their currency stays cheap so Americans will keep shipping dollars over to them for their goods so their population will accumulate wealth and the economy will keep growing in order to avert rebellion. You think France and Germany together would be able to consume enough to help China raise its population out of poverty and send them enough Euros? HELL NO! It's hard enough to just find a Frenchman with a job, much less one that will spend his money on Chinese goods.
Tiananmen Square ring a bell. Placate the populous by giving them huge rates of economic growth while elevating them out of poverty and guess what? They stop aiming their sites at governmental overthrow. It works for a while, but not forever.
You see much of this has little to do with the Fed. Like others have stated, Americans will consume as long as others are willing to keep feeding us and accepting our "worthless currency".
