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Is the US dollar depreciation policy helping to pay down the 14.5 trillion USD national debt more quickly?

Asked by: forexsheet 65 views aggregate demand, company export, currency depreciation, debt level, depreciation policy, devaluation, domestic inflation, foreign currency, inflation adjustment, intensive purposes, interest payment, market currency, money supply, national debt, payment obligation, printing press, qe2, rmb, treasuries, world currencies

I’m looking for feedback on the current depreciation of the USD (depreciation as opposed to devaluation given that we are a free floating market currency traded against other world currencies).

My understanding is that the depreciation is occurring indirectly via inflation.

This is occurring primarily because:

The Fed is effectively printing more money via the printing press and was engaged in QE2 whereby they bought treasuries (IOU’s) in the open market and introduced more money supply into the system.

All the new currency in the system effectively depreciates the dollar against other world currencies such as Euro, Sterling and Yen, but not the RMB as the RMB is for all intensive purposes pegged to the dollar within a 5% fluctuation band.

The consequences of this action should result in US company export improvement as US goods become more competitive, and their overseas sales in Euro/Yen/Sterling are repatriated back to US. In short, people believe this will stimulate economy via an improvement in Aggregate demand and improve job growth rates etc…

But in terms of our 14.5 trillion USD national debt, is this currency depreciation policy actually improving our existing notional debt level?

Thinking about it:

1. US domestic inflation should make the real rate of return negative thereby reducing the FEDS interest payment obligation on treasuries. Although, I believe a lot of the treasury IOU’s have inflation adjustment mechanisms built into their rates now?

2. The QE2 policy of buying treasuries in the open market pays down existing debt more quickly.

Are we using higher value foreign currency to pay down debt at a quicker rate? Every foreign unit of currency now has more purchasing power against existing USD denominated debt?

I also realize that foreign holders of our debt aren’t exactly happy about the whole situation. For example, if the UK government had 100 billion of US treasuries it’s now approximately worth 60 billion sterling at expiration using today’s FX conversion rates instead of 75 billion last year. So in other words if the Fed retires this debt today there should be a benefit to paying it back using foreign currency?
On the other hand the Chinese as one of our largest creditors shouldn’t be that unhappy as their currency is literally pegged so I’m not convinced that the dollar depreciation policy is impacting them other than by adding to their existing inflation concerns…

Tags: aggregate demand, company export, currency depreciation, debt level, depreciation policy, devaluation, domestic inflation, foreign currency, Forex, inflation adjustment, intensive purposes, interest payment, market currency, money supply, national debt, payment obligation, printing press, qe2, rmb, treasuries, world currencies

1 Answers

No Body on Dec 09, 2011

Not familiar with all of the terminology used but I’ll give you my opinion on the subject.

In a broad sense, a depreciating dollar should make it easier for the US government to pay off its debt. By increasing the money supply we’re effectively decreasing the value of the debt. Let’s put this into a simple equation:

Let A=debt owed (in US dollars, constant), V=value of US debt (no units), M=money supply (in US dollars). We have:
A = VM
That is, the value of the debt and the money supply are inversely proportional to each other. The situation that is currently happening is that the money supply is increasing (Fed is printing more bills). Assuming that the debt amount is constant (not true but for a specified amount of debt this would be true and that’s what we want to look at) this leads to a decrease in the value of the debt, hence making the debt easier to pay off.

Another way to view this is that the US government could pay off the entire debt right now by simply printing $14.5 trillion. However such a drastic increase in the money supply would make the dollar worthless and would cause problems far worse than carrying around debt.

As for the Chinese they don’t want the dollar to depreciate since they have so much invested in dollar-backed securities (US treasuries). Assuming the Chinese want to be paid back eventually they’d want to be paid back with a higher valued currency rather than a lower valued one because that allows them to purchase more goods from countries other than the US with the same amount of dollars.

Is the US dollar depreciation policy helping to pay down the 14.5 trillion USD national debt more quickly?

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