Something is Wrong
Written By Madeline Graf
The US dollar has been skyrocketing in value against other major currencies such as the euro, British pound, and Japanese yen. Following the relatively strong performance of the American economy and its recovery post-COVID, as well as its tightening monetary policy by the Federal Reserve, there is reason to believe this increase in value may continue well into 2023. Although we may see a decline in the growth of value in the near future due to a gradual slowing of the American economy, there is also strong support for the continuation of the factors that are nurturing this growth. While this appreciation in the dollar will no doubt benefit the US with its role in decreasing domestic inflation, there will be a variety of implications for investors and the rest of the world.
Although the Federal Reserve is aiming to lessen the impact of inflation on the US economy with increasing interest rates, the rest of the world is experiencing the impact in the opposite direction. Both rich and poor countries are experiencing an increase in prices, debt, and overall inflation. China recently has set the renminbi at its lowest value in two years, while making plans to control its depreciation in value. Poorer countries are facing the brunt of these policies, with Nigeria and Somalia experiencing an uptick in prices of medicine and fuel while under the increasing pressure of starvation. Even worse, the strength of the dollar is attracting more investors with its better returns and Cconsequently, emerging markets are experiencing a decrease in investments, which places these economies under more pressure.
The potential dangers of the impact of economic policies in these situations mirrors the 1943 Bengal famine in India. While this may be a particularly extreme case, it illustrates the huge impact that monetary policy can have on the lives of those in emerging economies. Although the Bengal famine has usually been attributed to unfavorable weather conditions, research shows that the crisis was triggered by war-time inflation that increased the prices of food beyond affordability. During this time, World War II was at its peak, and the British needed resources to fund the military. British economist John Maynard Keynes designed a policy to force a transfer of wealth from ordinary Indian citizens to the military through printing huge amounts of money for military expenses. As a result, demand for staple goods skyrocketed, while wages did not follow this trend, causing poverty and starvation.
Thus, while the strengthening of the US dollar may be good news for the domestic economy, other countries, especially poorer ones, are at risk of a deep recession.
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