Time Value of a Dollar - Essay Example

Critics are already arguing that the dollar can no longer be the reserve currency especially after the collapse of the U.S mortgage market, which set off the most awful global recession recently. There are a couple of reasons people prefer the present value of a dollar. If they can invest the money to earn interest over a period of time that is greater than a future payment, they will invest it in the present. Inflation is also a key factor in time value evaluations since it reduces the spending power of a dollar.

Inflation is the persistent increase of prices and a dollar today may buy less quantities of a similar commodity in the future. Taking this into consideration one would rather invest now in a project that would earn them continuous cash flows rather than save that money to use it at a future date. Another reason is the default risk, which is the threat of not receiving the promised dollar in future. To understand time value of money we define the terms Net Present value, Future present value and present value.

The net present value is the value of future streams of cash flows into the cash at hand in the present date. The future value is the value of the money an individual has now at a later day. . Different scholars explain that there is need to create strong fundamentals of the U.S economy, build investor confidence and diversify out of the dollar in order to protect it from depreciating with time. The U.S economy has weak fundamentals such as huge national debt, high unemployment rates, and international military operations.

In a highly publicized vote the senate recently raised the debt ceiling to $14.3 trillion to avoid defaulting debt obligations which would be a catastrophe by itself. This could create a debt driven crisis that could strain standards of living by being detrimental to economic growth, dampen wages and restrict the government from investing or providing a safety net. It is necessary that the debt ceiling is not exceeded so as to prevent this debt driven crisis as it would accelerate the depreciation of the dollar.

Military expenses are not productive and are a nonmonetary reason for inflation, an opinion that most economists share. There is the need to show creditors that the government is serious about stabilizing federal debt. Spending cuts are necessary to protect against the decreased value of money in future. Building investor confidence is a key to protecting the future value of money, and the government must ensure that it restores investor confidence for most believe that printing excess money for bailouts and stimuli will eventually weaken the dollar (Steverman).

Asset prices should be watched carefully so that they remain in line with their underlying values and also do all it can to ensure economic growth. So far, the low dollar policy has helped as it has ensured that exports remain higher than imports. And if this keeps up there is hope that in the future the value of the dollar will be