Doesn’t common sense tell us it’s not quite that simple? If it was, why has Bush promoted the so-called strong dollar policy? Why don’t we just push the dollar down another 50%? The answer is that while what you say is true, there are also negatives to a falling dollar. For example, China & Japan have about $2 trillion of USD denominated reserves, held mainly in US Treasuries. Do we really think they are going to sit there and watch the real value of their holdings decline w/o taking any kind of action? As they diversify out of USDs, what do you think will happen to interest rates? What’s to stop a downward spiral where diversification out of the USD pushes the USD down further causeing further diversification out of the dollar?
The only thing that can stop a dramatic decline is either Budgetary Discipline in DC...(BWAHAAGGAA..cough cough..)
Or Banks and the Treasury or Fed can buy up dollars propping up support for it, a weak dollar is double edged sword indeed, Japan and China can now buy US assets for half price now.
“For example, China & Japan have about $2 trillion of USD denominated reserves, held mainly in US Treasuries. Do we really think they are going to sit there and watch the real value of their holdings decline w/o taking any kind of action”
For a move this big in the dollar, they (china at least) certainly already are taking steps to reduce exposure to some degree.