Many Variables in the Dollar’s Value

“Why Dollar Worries May Be Just a Distortion” (James Flanigan, July 18) makes an almost offhand reference to the danger of inflation resulting from a declining dollar and then offers calming reassurance that China and Japan will continue to support the dollar because it is in their best interests to do so.

This overlooks the fact that not only is the dollar in decline but that investment in U.S. bonds used to fund the national debt is also in decline.

Where is this safety valve to which Flanigan refers? The column completely overlooks why this is dangerous and why it is inherently inflationary.

The United States has two means of funding its debt: One, it can increase interest rates on the bonds it sells in order to attract more investment, or two, it can print money to fund the debt.

Both are inflationary, both have been tried before, and both led to massive inflation and recessions.

Michael Solomon

Canoga Park

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The principal variable affecting the dollar’s value in the long run is no doubt the balance of trade in goods and services.

Some believe that the continuing U.S. trade deficit and the resulting current account deficit are serious problems. They argue that the dollar is much overvalued and fear that it will someday collapse, with repercussions worldwide.

Based on the historical record, however, that seems unlikely. There have been relatively sharp changes in the value of the dollar in the past without any long-term damage.

In free markets with floating exchange rates, a current account deficit will ultimately be self-correcting. When foreigners feel they have accumulated more dollar assets than they wish to hold, the foreign exchange value of the dollar will decrease as the unwanted dollars are offered for sale.

William F. Hummel

Ladera Heights

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Flanigan’s basic argument does not make sense. Why should creditors keep lending money to a debtor who cannot repay? At some point they will and should cut off the credit and walk away.

It is not the end of the world for the United States if the creditors walk away. There will be a nice or not so nice downward adjustment to the standard of living.

Naren Balasubramanian

San Jose