All civil comments are welcome! ***** The dollar is devaluing. Treasury CEO Paulson and ECB head Trichet are both fine with this, according to Bloomberg (Apr 10, 2007, http://www.bloomberg.com/apps/news?pid=20601109&sid=a0uQpKUwnrUI&refer=news). A dollar is worth about 0.75 Euro as of this writing, down from 0.82 a year ago, almost a 9% drop. The dollar is down from buying over 1.10 Euros in 2001, an astonishing 31% drop. Bush's Reaganomicsesque "massive tax cuts for the rich" plan produced a massive budget shortfall just as the extremely expensive invasions and occupations of Iraq and Afghanistan were launched. The shortfall was made up by going into massive debt. Interest rates were held artificially low during this period so that the government wouldn't have to pay much interest on the money it was borrowing. As a side effect, this sparked the housing bubble that is now bursting and wreaking havoc in the mortgage industry. It is too soon to say whether this burst will spread to the finance sector and thence to the larger economy. The invasion also sent oil prices skyrocketing, which produced a big charge against the economies of the developed nations in general and the US in particular. Ongoing rapid economic development in the emerging economies, particularly in manufacturing (as free trade offshores more and more of the developed nations' manufacturing base), simultaneously produces ever increasing worldwide demand for oil and other commodities, especially raw material metals, while reducing the cost of the finished products in terms of major currencies, creating inflation. The US policymakers must maintain the illusion of a prosperous economy as long as possible for political reasons. The wars are very unpopular; a simultaneous economic downturn would be a political disaster for those in charge. The massively low interest rates that were set for war borrowing not only sparked a disastrous housing bubble, they also produced a great deal of inflation. They've raised rates a bit since then to contain the inflation somewhat, but they cannot raise them much further without aborting the nascent economic recovery taking place since the 2001-3 downturn, given the huge upswing in commodity and particularly oil prices. The paper recovery is based more than anything else around easy money and revaluation of scarce capital assets against inflation. The solution: devalue the dollar. The honchos all have their assets in European bonds (http://www.counterpunch.org/whitney07052006.html). The devaluation functions as a tax on anyone who holds dollar assets, which is used to decrease the real value of the nominal bond debt the Bush administration has incurred to simultaneously finance the war and its tax-cuts-for-the-rich program. The devaluation is politically justified by claiming that it will make US exports more competitive in the world market; unfortunately, the US economy is largely driven by consumer spending and exports relatively little these days. As the dollar plummets, central banks across the world are dumping their dollars, or at least halting new purchases and shifting to buying Euros as a reserve currency. Iran, Russia, and Venezuela are already transacting oil sales in Euros; Russia, in roubles, as well. This only increases the downward pressure on the dollar. European exporters are hurt by the strengthening of their currency. Why does the ECB accept the situation? Their own economy is not doing so great as the heavy costs of absorbing East Germany and Eastern Europe generally into the Union weigh on their economy; however, these countries are at the same time experiencing phenomenal GDP growth as they modernize and provide cheap labor to the Western European countries. The EU economy does seem to have marginally improved lately, anyway. Rather than raise Eurozone interest rates to contain the Euro's rise and risk damaging or slowing down the eastern European integration, the ECB authorities are prepared to take the negative effects of a higher Euro now in the interests of keeping easy money available to finance eastern European integration, so as to get the eastern economies on par with the west that much faster. The much more socialist cast of European society also undoubtedly plays a role; short-term export growth is not as much of a priority as it would be for US or Japanese policymakers. As a nice side effect, Europeans can now afford more consumer goods from China, too. In the near to medium term, the US equities market will continue to rise (slowly) as the dollar devalues, to re-price the real assets held by the corporations at new inflated nominal values, offering the illusion of economic prosperity to the financial public. In the 1970s, this situation of ongoing inflation with little real economic expansion was called "stagflation".