Dollar
by
David Collum
In the Big Rock Candy Mountains,
The jails are made of tin.
And you can walk right out again,
As soon as you are in.— Harry McClintock, Big Rock Candy Mountain (1928)
Fresh from releasing his exhaustive and excellent Year In Review last week, Dave Collum sits down with Chris to discuss the key developments of 2012 in detail.
David Collum: We’re Headed for a Showdown
by David CollumIn the Big Rock Candy Mountains,
The jails are made of tin.
And you can walk right out again,
As soon as you are in.— Harry McClintock, Big Rock Candy Mountain (1928)
Fresh from releasing his exhaustive and excellent Year In Review last week, Dave Collum sits down with Chris to discuss the key developments of 2012 in detail.
by
charleshughsmith
Executive Summary
- Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
- Why the euro's troubles have been good for the price of gold
- Why the dollar can strengthen despite the United States' wishes
- Why the future may well see the price of both gold and the U.S. dollar rise
If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.
In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy. Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy.
Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.
Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.
Here is the Wikipedia entry on Triffin’s Paradox:
The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)
The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.
This leads to some startling conclusions that many have great difficulty accepting…
Why Gold & the Dollar May Both Rise from Here
PREVIEW by charleshughsmithExecutive Summary
- Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
- Why the euro's troubles have been good for the price of gold
- Why the dollar can strengthen despite the United States' wishes
- Why the future may well see the price of both gold and the U.S. dollar rise
If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.
In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy. Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy.
Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.
Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.
Here is the Wikipedia entry on Triffin’s Paradox:
The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)
The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.
This leads to some startling conclusions that many have great difficulty accepting…
by
charleshughsmith
Whenever I make the case for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:
- The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
- When the global financial system finally crashes, won’t that include the dollar?
- The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.
The general notion here is that, given the root causes of our economic distemper – rampant financialization, over-leverage and over-indebtedness, a politically dominant parasitic banking sector, an aging population, overpromised entitlements, a financial business model based on fraud, Federal Reserve monetizing of debt, and a dysfunctional political system, to mention only the top of the list – how can the USD appreciate in real terms?
Gold & the Dollar are Less Correlated than Everyone Thinks
by charleshughsmithWhenever I make the case for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:
- The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
- When the global financial system finally crashes, won’t that include the dollar?
- The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.
The general notion here is that, given the root causes of our economic distemper – rampant financialization, over-leverage and over-indebtedness, a politically dominant parasitic banking sector, an aging population, overpromised entitlements, a financial business model based on fraud, Federal Reserve monetizing of debt, and a dysfunctional political system, to mention only the top of the list – how can the USD appreciate in real terms?
by
Gregor Macdonald
Executive Summary
- Why household balance sheets are worse off than advertised
- Why the recent rosy BLS jobs numbers actually mean bad news
- How the Fed is squeezing investor capital out of other traditional asset pools and into the stock market
- Expect to see the stock market moving higher in 2013; that is, until QE3 fails
- What to expect if QE3 fails sooner than anticipated
If you have not yet read Part I: The Future of Gold, Oil & the Dollar, available free to all readers, please click here to read it first.
Market historians have recently started to point out that the current advance in the S&P500 is now 40 months old and has made gains of over 115% since the March 2009 lows. In other words, the doubling from the lows in price and the duration of the advance now late in its third year together suggest that a cyclical top is near. Furthermore, despite some noise in U.S. macro data – which has been briefly more hopeful, yet remains well within the phase of stagnation – earnings estimates have been coming down as the world economy continues to shift into lower gear.
Perhaps for the first time in a while, we can actually say that the Fed's decision to start QE3 was moderately anticipatory, in contrast to its ad-hoc and reactive policymaking over the past five years. It is not merely that the Fed soberly accepted that the economy was not getting better. The stagnant, tractionless macro data over the past year has spoken quite loudly to that fact. Indeed, the U.S. economy is merely treading water, and the Fed's move to QE3 serves as a sharp retort to those who would relentlessly attempt to portray stagnation as recovery.
Where Stock Prices Are Headed Over the Next Year
PREVIEW by Gregor MacdonaldExecutive Summary
- Why household balance sheets are worse off than advertised
- Why the recent rosy BLS jobs numbers actually mean bad news
- How the Fed is squeezing investor capital out of other traditional asset pools and into the stock market
- Expect to see the stock market moving higher in 2013; that is, until QE3 fails
- What to expect if QE3 fails sooner than anticipated
If you have not yet read Part I: The Future of Gold, Oil & the Dollar, available free to all readers, please click here to read it first.
Market historians have recently started to point out that the current advance in the S&P500 is now 40 months old and has made gains of over 115% since the March 2009 lows. In other words, the doubling from the lows in price and the duration of the advance now late in its third year together suggest that a cyclical top is near. Furthermore, despite some noise in U.S. macro data – which has been briefly more hopeful, yet remains well within the phase of stagnation – earnings estimates have been coming down as the world economy continues to shift into lower gear.
Perhaps for the first time in a while, we can actually say that the Fed's decision to start QE3 was moderately anticipatory, in contrast to its ad-hoc and reactive policymaking over the past five years. It is not merely that the Fed soberly accepted that the economy was not getting better. The stagnant, tractionless macro data over the past year has spoken quite loudly to that fact. Indeed, the U.S. economy is merely treading water, and the Fed's move to QE3 serves as a sharp retort to those who would relentlessly attempt to portray stagnation as recovery.
by
Gregor Macdonald
The ability of reflationary policy to mute the worst risks of debt deflation has been a source of enormous frustration for stock market bears ever since the 2008 collapse. Yes, the initial moderate rally out of the S&P500’s black hole was perhaps not so surprising in 2009. Bombed-out stock markets can always manage some sort of rally. But the ability of the rally to continue through 2010, and then 2011, and now 2012 has been quite vexing and painful for bearish investors.
Indeed, the entire post-2008 market phase has now produced an era of consistently poor performance for hedge funds. Recent data, for example, shows that an incredible 90% of hedge funds are underperforming the S&P500 through mid-September.
Will the pain continue?
The Future of Gold, Oil & the Dollar
by Gregor MacdonaldThe ability of reflationary policy to mute the worst risks of debt deflation has been a source of enormous frustration for stock market bears ever since the 2008 collapse. Yes, the initial moderate rally out of the S&P500’s black hole was perhaps not so surprising in 2009. Bombed-out stock markets can always manage some sort of rally. But the ability of the rally to continue through 2010, and then 2011, and now 2012 has been quite vexing and painful for bearish investors.
Indeed, the entire post-2008 market phase has now produced an era of consistently poor performance for hedge funds. Recent data, for example, shows that an incredible 90% of hedge funds are underperforming the S&P500 through mid-September.
Will the pain continue?
by
charleshughsmith
A year ago, in the wake of then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency has strengthened notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.
The Siren Song of 'Beautiful Deleveraging'
In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.
Welcome to the Era of ‘Ugly’ Inflation
by charleshughsmithA year ago, in the wake of then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency has strengthened notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.
The Siren Song of 'Beautiful Deleveraging'
In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.
by
Adam Taggart
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