This one is easy. Let’s say you are a foreign government or a person with some money to invest and you are looking for a safe investment, especially now during this recession. Well, historically, United States government debt in the form of T-bills, T-notes, etc. have been a good investment, but now, with the reasonable expectation that the administration will create a multi-hundred-billion dollar (on the low end) to multi-trillion dollar health insurance program and will pay for it through deficit spending, the threat of dollar devaluation rises. With inflation possibly over the horizon, investors choose to either wait out to see what happens or they invest elsewhere fearing that the dollar will reduce in value. This means that the overall demand for the dollar falls and as the government prints more and more money to “stimulate” the economy, increasing its supply, the value of the dollar declines in the long and short term.

This has happened already. We have seen that the US dollar has fallen compared to most other major currencies. This in turn leads to higher costs for nearly everything that we Americans buy. The US debt is a major reason that the dollar’s value declines… so we can say in absolute terms, the record-smashing spending passed by the Democrats in Congress have already, in six short months, made Americans who hold US dollars considerably poorer. The more that the administration and the Congress talk about deficit spending or entitlement spending, the more worried investors get. If we cannot get deficit spending under control and get the Federal Reserve to enact measures that reduce inflation once the recovery is underway, then inflation will rage out of control. This is why fiscal discipline, lacking under Bush and completely out the window with Obama, is so important.

-AG