The value of the dollar, like all other unbacked (intrinsically worthless) currencies, will continue to fall relative to a basket of commodities and services because the supply of such currencies is dependent on the whims of central banks, whose governing boards being not wholly uninfluenced by their respective federal governments, have a preference for expanding the money supply to make the economy appear to be doing well and the deficit small by inducing spending. This is usually a gradual, but persistent process, which eventually results in the value of unbacked currencies reaching their intrinsic value, i.e., zero. This process is usually very gradual, but it can be very rapid, which is called hyperinflation. Hyperinflation typically happens when governments try to finance previous debt, wars, and generous social programs by printing bills (indirect taxation via inflation), rather than through direct taxation.
To acquire revenue, Republican administrations tend to favor indirect taxation; whereas, Democratic administrations tend to favor direct taxation. Historically, neither Republicans nor Democrats have ever actually produced a net cut in government spending because of the preference of those in power is to increase their power by increasing the size and scope of government. In general, government grows the least and the economy does best when there is gridlock in Washington, resulting from a mixture of Republicans/Democrats in the legislative and executive branches.
Since both US dollars and foreign currencies are inflationary relative to durable commodities, the question becomes which is more inflationary. This is mainly determined by the policies of the central banks of the respective countries, but is also influenced by the extent to which the governments and citizens of those countries are debtors. In other words, how much there is a demand for money. One can think of the banking system as a system that creates and destroys money on demand. They can adjust the demand for money by adjusting the interest rate for a loan. When a loan is taken out, say, to purchase a house, an enormous quantity of money is instantly injected into the economy. This is because only 10% of the money needs to be in the bank as reserves, the rest is simply printed up out of thin air by the federal reserves accounting scheme. As the loan is repaid the money is destroyed again. ->
lowered interest rate / lowered reserve requirement -> increasing demand for loans -> increasing demand for deposits -> higher deposit interest rate -> more bankable deposits -> increasing money supply -> monetary inflation (10x the money supply),
high interest rate -> low bank holdings -> monetary stability
To understand why, consider that Alan Greenspan encouraged a period of enormous inflation in order to avert a recession. He did this by lowering the prime lending rate. Monetary expansion does tend to delay recession, but it only makes the inevitable recession larger and more painful than it would have been had there been no monetary expansion in the first place. Interest rates reached a low of 4.0% in Jun, 2004. When interest rates are lowered this results in almost immediate inflation in the housing market as people rush to finance and re-finance; however, housing is not included in the federal reserve's inflation indices and since this inflation requires several years to trickle down into the rest of the economy, there is a lag in the time the fed responds to the inflation that they created by raising interest rates again. Currently, the rate is at 6.25% and Greenspan will probably continue to raise interest rates for several years.
As rates go up, people stop being able to afford houses and people with variable-rate or interest-only loans can no longer afford the monthly payments on their homes, forcing them to sell. Both the people who stop buying and those who are forced to sell contribute to a depression of housing prices, meaning that people can no longer tap the rising values of their homes to live beyond their means. The US starts to go into recession. Whereas consumers previously were spending beyond their means, they start to save. This backs up inventories and money must be reinvested. This liquidation and reinvestment is expensive, hurting the US economy.
The problem for the dollar is that when banks start collapsing, the federal reserve/government will try to bail them out (creating dollars), rather letting them fail (liquidating dollars). This demonstrates the inevitability of the inflation of intrinsically worthless currencies given the preferences of bureaucrats for delaying the pain of recovery.
That the value of the dollar continues to decline relative to a basket of foreign unpegged currencies is then more a function of how government chooses to finance its profligate spending and the rate of that spending. Below is a chart that gives general recommendations of whether to buy or sell dollars against a diversified basket of foreign unpegged currencies:
| Legislative | Executive | Greenspan Thinks Economy Is | Sell Dollars? |
| Republican | Republican | Weak | STRONG SELL |
| Republican | Democratic | Weak | HOLD |
| Democratic | Republican | Weak | BUY |
| Democratic | Democratic | Weak | SELL |
| Republican | Republican | Strong | HOLD |
| Republican | Democratic | Strong | BUY |
| Democratic | Republican | Strong | STRONG BUY |
| Democratic | Democratic | Strong |
