Falling Dollar, Higher Inflation, Debt Ceilings…What Does it all Mean? | AccountingWEB

Falling Dollar, Higher Inflation, Debt Ceilings…What Does it all Mean?

People continue to ask me for my opinion of what is happening with the budget deficit and debt ceiling. Why are food prices going up and the cost of gas surging? What is the economic future for our country? I wish I was smart enough to have answers to all these questions…because if I were I would probably be sitting on my own private island. 

First, a very quick history lesson. In 1944, after World War II, over 700 world leaders from the over 40 allied nations met in Bretton Woods, New Hampshire for the purpose of stabilizing and reorganizing the world’s economy. As a result of this conference a new postwar monetary policy was developed. It resulted in history’s first example of a fully negotiated monetary order intended to govern currency relations among sovereign states. The result was the creation of the International Monetary Fund (IMF), the World Bank Group, and the General Agreement on Tariffs and Trade (GATT).
At this conference each country agreed to a monetary policy based on the “Gold Standard.” They each agreed to maintain the integrity of their currency based on a fixed price related to one ounce of gold. They also agreed that the U.S. Dollar would become the reserve currency for rest of the sovereign states (which it still is today). In 1971, the U.S. left the “Gold Standard” and allowed our dollar to become “free-floating fiat currency.” Many debate if this was wise move, but it was largely done to grow our economy.
So around the world, many other countries’ central banks need to use the U.S. Dollar as the reserve currency and keep a supply of on hand. This also means that gold and oil are priced based on the U.S. Dollar. For the past 60 plus years the dollar has remained the dominate currency and allowed our government to freely issue debt and borrow against our economic strength.
But all that has been changing during the past few years and certain events are causing the U.S. Dollar to fall out of favor and literally fall in value when compared to other major currencies. This week the dollar hit a 15-month low against the Euro.
So, what is causing this falling dollar and why does it matter?
First, with our national debt ceiling at $14.2 trillion (and our deficit fast approaching this self-imposed borrowing capacity) our investors are getting nervous. Then just last week Standard & Poor’s (the rating service) downgraded the outlook for our sovereign debt to a negative outlook.
We now have key members of the G8 nations who have been openly discussing moving off the dollar as the reserve currency and instead moving to a global standard.
And, finally you have what was called the second round of Quantitative Easing (QE2) coming to an end. This literal printing of money by the Federal Reserve has pumped over $600 billion into the economy. This has the impact of making everyone else’s dollars worth less…or basically causing the price of goods to rise (think oil, food…).
But is this the cause of oil and gas going up? Historically an ounce of gold is worth about 15 barrels of oil. This correlation has held true for decades with some minor fluctuations (15/1 ounce/barrel ratio). Currently an ounce of gold buys roughly 15 barrels of oil and would support the theory that the real price of oil has hardly changed at all over the last 10 years. What has happened is that a weakened dollar is buying much less.
What does all this mean now and to the upcoming political battle over the U.S. Government debt ceiling? Many are saying if we do NOT increase the borrowing capacity of our government (and remember we currently borrow 40 cents of every single dollar we spend) we will have a Financial Armageddon and throw our country back into a massive recession. There may be some truth to this claim, but what failing to increase the debt ceiling would do is force a balanced budget on our government. They cannot spend what they are not authorized to spend. It would force congress to figure out how to spend the actual dollars they collect (wow, what a crazy idea…sarcasm added intentionally).
The next few weeks may be some of the most important in decades for our country. If the debt ceiling continues to be increased and Washington does not take some drastic measures to strengthen our dollar, our balance sheet, our fiscal position… we may wish another deep recession was the worst thing to happen. We may all learn what the word Hyperinflation means!!!

This blog

by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.