Questions and inquiry in academic research

Strength of U.S. Dollar in Relation to the Exchange Rate.

There is no question that most people consider a "strong dollar" to be an overall good thing. After all, it just feels good to change one's U.S. dollars for Canadian ones, for example -- it makes one feel ahead of the game before setting foot outside of the exchange building. However, as joyful as one might feel in the initial stages of shopping euphoria when abroad in a weaker currency climate, the reality of just what that strength really means is a bit more complex.

When the U.S. dollar gains strength, its value rises in comparison to other currencies. Of course, at least on some levels, and in broad terms, this results in the ability of American dollar holders to buy an increased amount of a given foreign currency -- which in turn results in a drop in overall prices from the countries trading in the weaker currencies. Further, in many cases, reduced prices on products coming from weaker currency nations can actually help to keep the rate of inflation down. (ChicagoFed, 2004).

Interestingly, however, there is a flip side to the strengthening dollar -- and that is the negative toll it takes on the ability of U.S. companies to compete in weaker markets. Although the American consumer can buy foreign goods at a cheaper price, so can other consumers from other nations. Thus, the demand for U.S. products drops, the influx of foreign visitors falls with their ability to benefit from currency exchange, and the willingness of foreign investors to invest in U.S. interests can drop due to increased U.S. borrowing (2004).

Although it may also seem that a strong dollar can benefit some at the expense of others (for example U.S. tourists verses a U.S. exporter or service provider), the fact is that any strong imbalance of currency can weaken the economy overall. Instead, many assert that a relatively stable "neither high nor low" dollar should be the ideal (2004).

Another interesting fact is that a strong dollar with regard to any foreign currency may not be strong "historically." This means that, although the buying power of the dollar verses the Jordanian Dinar, for example, may increase short-term, the fact that it once (perhaps many years ago) exchanged at an even better rate would render it still weak.

2. Federal Budget Deficit

The U.S. Budget Deficit is a subject of much heated debate. Indeed, in that the budget deficit has grown to such an unimaginable number (The federal budget deficit is projected to hit $368 billion in fiscal 2005 (CNN, 2005)), many Americans, ordinary and economist, view it as a black cloud of impending and inevitable doom.

As most people know, the spending of the United States government is simply not supported by its revenues. This has been the case since 1969, (2005) after which the deficit has grown exponentially (many assert due to defense spending). Interestingly, however, many in government do not seem particularly concerned with reducing this deficit, perhaps believing that the overall world economy will somehow magically support such amazing debt. However, many do not agree with this perspective.

One person who has been particularly vocal about the danger of the deficit is Alan Greenspan who has long been in support of finding some kind of real solution to the problem of the escalating deficit. Further, Greenspan points out that there may be a very real and unpleasant outcome should the deficit not be handled quickly, saying, " ... substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad (Aljazeera, 2005).

In fact, many in the financial and economics world worry that not only could the deficit cause an extremely damaging loss of confidence (reverberating in the consumer, investment, and trade realms), but it could also immensely damage the value of U.S. currency as a whole. According to one report published by the BBC, such a loss in confidence could ultimately result in "a run on the dollar," along with a tremendous rise in interest rates charged on the Federal debt, a pummeling of the stock market, an overall weakening of the banking system, as well as a drop in overall private spending (BBC, 2005).