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The government bond issued at international market for borrowing funds to under take public projects can have a devastating future impact to the country economy and currency value if there is no strong operational monetary and fiscal policy in place. What are the future risks and impacts to domestic economy of international bonds issued by state governments?
The value of the U.S. dollar as of July 1, 2003 had fallen by 9.1% since its peak in February 2002.1 The benefits of the falling dollar vastly outweigh the costs for the U.S. economy. The primary costs of the falling dollar are higher prices for imported goods and for American tourists traveling abroad. The primary benefit is increased price competitiveness of U.S. products, both for exports abroad as well as in the domestic market. The United States currently has an enormous trade deficit (importing more than it exports), which represents a significant drag on efforts to spur economic growth and create jobs, and has led to an accumulation of foreign debt that will have to be repaid in the future. Given this trade deficit, the benefits of greater international competitiveness prompted by the falling dollar greatly outweigh the costs.
This dollar decline has come largely in spite of the Bush Administration’s stance in favor of a “strong dollar.” The “strong dollar policy” (pursued by both the Clinton and Bush Administrations) has been deeply damaging to the U.S. economy, leading to significant job loss in the manufacturing sector and the accumulation of historically large trade deficits. This overvalued dollar policy should be reversed, and a larger (although orderly) decline in the dollar should be encouraged instead. In the long term, U.S. exchange rate policy should aim to avoid large trade deficits. This could be accomplished through international policy coordination that allows exchange rates to float within a flexible band, but prevents them from getting so overvalued that they generate large trade deficits.2
In recent weeks, the dollar has again risen against the euro. If the dollar is allowed to rise from its current value, this will be a squandered opportunity to generate growth and employment in the United States, especially in the manufacturing sector. If the recent fall in the value of the dollar is sustained, the U.S. economy will be effected in the following ways: