Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.2 9/18/84; site jhunix.UUCP Path: utzoo!linus!philabs!cmcl2!seismo!umcp-cs!aplcen!jhunix!ins_aprm From: ins_aprm@jhunix.UUCP (Paul R Markowitz) Newsgroups: net.politics Subject: dollar economics Message-ID: <1120@jhunix.UUCP> Date: Thu, 7-Nov-85 14:51:34 EST Article-I.D.: jhunix.1120 Posted: Thu Nov 7 14:51:34 1985 Date-Received: Sat, 9-Nov-85 05:45:05 EST Distribution: net Organization: Johns Hopkins Univ. Computing Ctr. Lines: 51 At the risk of generating a long debate on yet another worthless topic, I wish to make a few points about the current strength of the dollar and what needs to be done about it. Recently, the dollar has been overvalued on the foreign exchange market to the point that all those economists who normally say, "don't worry, the market will take care of it", are now saying there is a problem. The problem is this: the dollar is strong that American corporations are having problems competing on foreign markets while foreign corporations are having an easy time under-selling American companies here in the US. This has caused a major US trade deficit. The other side of the problem is the large capital outflow that the US is experiencing. What this means is that American dollars are leaving the country to pay for the massive imports. This is further compounded by the fact that foreign companies are taking the money they earn and are investing it in the US where they can get a better rate of return. This is leading to an endless spiral where the value of the dollar increases without bound. The method used thus far to stop this effect has been to increase the money supply. This treats the symptoms but not the problem. The cause: In 1981, the Reagan administration instituted a series of tax reforms designed to aid the weakening economy. Among these was a revision of the tax code to allow accelerated tax writeoffs for depreciation. This was called the accelerated depreciation allowance. This allowance made it profitable to invest in the US rather than other countries. It also made investment become preferable to savings for US residents. The initial result was the one that the administration wanted: the economy grew and the recession ended. Unfortunatly, the administration didn't change the tax code after the country started doing well again. Eventually, the dollar apreciated significantly as a result of increased real interest rates due to the profitability of US investments. The result is the current situation. Recently, the gang of five (the US, Japan, Great Britain, Germany, and France) took action through central banks in an attempt to reduce the value of the dollar. This is only of temporary value if it is of any at all. The current economic situation was not changed and as soon as the market figures this out, the situation will be as it was before. What needs to be done is the accelerated depreciation allowance needs to be revoked in an attempt to make investment in the US less attractive. This will reduce the upward pressure on the dollar and solve at least part of the problem. The domestic economy may suffer a little for it but probably no more than it already is suffering from huge increases in the money supply that are necessary to pay interest to foreign investors. ------------------------------------------------------------------------ Paul Markowitz "$15,000 per year should earn me the right to express my opinion without fear of the university." seismo!umcp-cs!aplvax!aplcen!jhunix!ins_aprm bitnet: ins_aprm at jhuvms csnet: ins_aprm@jhunix arpanet: ins_aprm%jhunix@hopkins.ARPA