In this article, the crisis over the weakening US dollar is explained rather well. Now, I ain’t an economist but there’s one thing that seems to slow this decline that Bush has never tried…buying up US dollars.
a) Why has he never done this in eight years of office (per the article)?
b) And, what’s the pros and cons to this defensive tactic previously used to protect the value of the US dollar?
It sounds like our only option!
never works. Well, very rarely IIRC. The basic problem is: what does the US buy them with? Our (formerly) massive stocks of gold? The currency exchange market is larger than any country-including the US. Any attempt to influence the market that way would be counter-productive. It would make the US look panicked and clueless. Wait…
Anyway, it wouldn’t work and never works for any country that tries it.
To “fix” the dollar, we have to do it the old-fashioned way. Reduce our trade deficit and increase our interest rates. Neither are happening during an election year. The traders know it and the dollar falls.
I’d say that would be a sort of ‘treat the symptom’ approach to the problem. At a minimum, where would the dollars come from to purchase the dollars with? More T-Bills issued? That would mean we’d put more dollars on the market to bring dollars off the market. Oh, my aching head.
The weakening dollar is a sign of a systemic problem in the US economy. The simple fact is that there are too many dollars on the market to support the activity out there and demand isn’t keeping up.
A better fix, in my book, would be to begin to bring down the supply of dollars in the market by reducing federal borrowing. Every T-Bill issued brings, essentially, a future dollar into the present and therefore increase the supply side of the equation further. As long as we continue that sort of thing the dollar can’t regain its strength.
Ditto for consumer debt. By borrowing for non-appreciating assets (credit card debt for consumables and such) we also increase the apparent money in circulation. I don’t think I’d cry if that continued to tighten up. It would be painful to be pushed towards living within our means but it seems that it will be one of the necessary steps towards righting the economic ship of the USA at this point.
While I would like a strong dollar because I travel a lot, I’m more a proponent of free floating market exchange rates, because it’s more efficient and sets a much better price signal than anything else.
As the other excellent answers in this thread already point out, buying more dollars with dollars or bonds is not a good thing and will only hurt more in the long run. Either the dollar becomes massively devalued, almost deflationary, or more likely, it causes harsh inflation and raised interest rates, leading to hyperinflation.
Strengthening the dollar requires less spending by the federal government and raising the interest rates. How you get there is a very political answer, though raising in the interest rates is a no-brainer (I say this as I have made all my major purchases for quite a while 
).
Could the US actually destroy dollars?
The dollar is dropping in value, because there are too many of them. There are too many dollars, because we buy more than we sell. a lot of the deficit in trade is with China; who persues a mecantalistic model: China wants to sell eveything and buy nothing. China will not buy US products, because they want to protect their own domestic industry. meanwhile, virtually all consumer products are now made outside the USA-try to buy US-made shoes, clothing, or TV sets-there are no more domestic producers.
This will change when it becomes cheaper to make stuff here, relative to China.
It’s been cheaper to make stuff in China for a good thirty-odd years. It isn’t the cost factor that has killed the dollar - it’s that moving all that production to China means the Chinese can cut out the middleman, produce stuff themselves, and then sell it to us, rather than simply “renting out” manufacturing capacity.
Sure. But don’t imagine this as the Fed taking wheelbarrows full of Franklins to the nearest incinerator. Actual greenbacks aren’t the issue here.
You see, the problem with the gummint destroying dollars is how few dollars Uncle Sam actually owns. In order to destroy dollars, you’d have to destroy somebody else’s dollars. So yeah, theoretically, the US could destroy trillions of dollars simply by defaulting on its debt. But, whooeee, I don’t even want to try to imagine the clusterfuck that would result. It’d be like swallowing a bullet to stop a headache.
Here is a paper from the Chicago Fed explaining who benefits and who loses out from a strong vs. a weak dollar.
Just down the road sits an abandoned machine tool factory (STEVENS-WALDEN). They made excellent tools -I still have my 30 year old S-W socket wrench set-it is so well-made that my grandchildren will us them. If you go to a tool store, all the wrenches now come from China-the set I own would probably retail for less than $20.00. except, the chinese-made sockets are cheap-made from remelted scrap, have of them will break within a year. The solution? buy a NEW set! So as long as China underprices us, and makes barely-acceptable quality, they will continue to get our dollars
Meh. Stanley and Facom and other high-end toolmakers still produce their tools in the US and Europe.
That is pretty much the image I had in mind, actually. 
If I remember right from Cecil’s column, money is basically borrowed into existence. Would it be possible to methodically and non-disastrously unborrow it?
A weakening dollar is a good thing. It’s how the world economy gives feedback to us.
We’re importing too much and exporting too little. The weak dollar makes it harder to import and easier to export, thus helping us to correct the problem. The government has too much debt. The weak dollar makes it more expensive to borrow more. The weak dollar is the messenger that we’re mismanaging our economy; don’t shoot it.
It’s silly to blame the weak dollar on the actions of other nations. We should expect other countries to act in a way beneficial to themselves. We certainly do. We’ve made our bed and now we get to sleep in it. We should help people who’ve been hurt by the changing economy, but it’s counter-productive to try to fight the change. That’d just make the inevitable change even more damaging.
On preview, Would it be possible to methodically and non-disastrously unborrow it?
That’s exactly what happens when interest rates go up.
Sounds about right to me. Manufacturers that produce what people want to buy will do well. Those that don’t, won’t.
And, unfortunately, the vast majority of people opt for cheap rather than good - ensuring the Chinese manufacturing monster a robust market for years to come.
I think I know the column you mean. It’s a good’un, so let’s start with it. You’re correct that money is basically “borrowed” into existence:
The next paragraph gets the government involved.
And you see where the government can “destroy” dollars, don’t you?
By saving money instead of spending money, the government can decrease the money supply. In other words, the process of simply balancing the federal budget is one way of methodically and non-disastrously unborrowing some of the dollars out there. Or, of course, we could impose stricter lending requirements on banks (e.g. increasing the amount of reserves that a bank must keep on hand).
But, in one of the most perverse and counter-intuitive twists of macroeconomics, the very act of balancing the budget is likely to weaken the dollar. A balanced budget depresses interest rates, and lower interest rates don’t attract foreign investors. Foreign investors who aren’t attracted to us aren’t willing to buy our dollars, and so the value of our dollars falls.
Weird, huh?
When you cut to the heart of it, the Fed could stop the dollar’s decline right quick simply by jacking up interest rates. Ah, but then higher interest rates would stagger an already hurting economy (and in an election year, to boot). We’d attract more foreign investors, though, and it would be easier for me to vacation in Europe. The Fed realizes that it’s been a while since I’ve gone gallivanting in the Old World, and they are sympathetic to my plight, but I haven’t yet convinced them to bump the federal funds rate for the sake of my world travel experiences.
How could they be such incorrigible cads?
I’m not sure that that’s always true. Canada balanced its federal budget about ten years ago and its dollar has strengthened. Of course, it also has a net positive balance of payments.
The CAD declined rather precipitously from 1995(the year the budget was balanced) to 2002(its lowest point), didn’t it? It’s true that the CAD has since risen, but I’d chock that up to the commodities boom and the fall of the USD.
Interestingly, there are some benefits to having a weakened dollar at this time.
1> Imports are more expensive. This reduces the outward flow of manufacturing from the United States.
2> It raises the price of Oil, which has many positive effects;
2a> It increases the cost of Imports, further reducing demand and making manufacturing within the US more attractive.
2b> It changes the Auto Industry in ways that could not be obtained through regulations and law-making.
2c> It makes formerly “too expensive” Alternative Energy processes more attractive.
2d> It makes drilling in the US more attractive and reduces the NIMBY pressure to stop oil drilling within our own borders.
2e> It makes Oil expensive for OTHER countries too, such as China, which is causing them to re-evaluate domestic subsidies on gasoline and likewise consider alternative energy sources.
3> It changes the Dollar/Yuan exchange rate issue in ways that could not be obtained through negotiation.
4> It makes US Exports cheaper on the world market.
5> It makes Dollar Hording nations step back and take a hard look at what they really intend to do with those otherwise stagnant piles of dollars. If they invest them or use them to develop their infrastructure (recyling dollars into the world economy in the process), this will be of much better end-benefit than merely sitting on them in US Bonds.
I’m sure if I sat here longer than the 10 minutes it took to type this up, I could come up with more reasons.
In theory, this is true, but in practice, it’s exceedingly difficult to show any connection between the amount of government borrowing and prevailing interest rates. Note the falling interest rates during the periods of deficit run-up in the '80s and the '00s.