How Western Civilization Will (Temporarily) Save the US Dollar

A law, not a theory, but a law of economics is if you print off more money, but the amount of goods and services remain the same, you will have inflation. 

There is no if's, and's, or but's about it.  YOu print off more money without a commensurate increase in the production of goods and services you have created inflation. 

This law is of course, masked by the complexities of central banking and international economics.  But pull as many tricks out of their central banking hats, in the end this law will end up proving true, undoing and unraveling all the tomfoolery and magic tricks central bankers try to play.

Many people are banking on such an unraveling.  They're buying gold and silver, ammo and guns, and some are investing in more stable currencies like the Norwegian Kroner or Swiss Franc.  However, there is always the issue of "investment horizons" and as John Maynard Keynes said, "Markets can remain irrational longer than you can stay solvent."  And today's US dollar is one such instance. 

THere is no doubt whatsoever that with "QE^1...n" set by the Fed there has been an increase in the money supply that outstrips the increase in GDP.  Naturally there should be inflation, but one of the little smoke screens employed by the Fed (or actually, a lack of business confidence in the US economy) is that those monies are sitting in the banking system, afraid to be lent out against such poor economic prospects.  So yes, the CPI shows no inflation, but the moment that money ever gets circulated into the economy or velocity increases (if you believe in that stuff) inflation will kick in.  Regardless, the larger point is it doesn't matter to the gold or silver investor WHERE the US dollars are sitting, all that matters to them is HOW MUCH DOLLARS ARE OUT THERE as that is what directly speaks to the price of precious metals relative to a fiat currency.

However, the above situation, though true, is over-simplified.  Specifically, it does not account for the irrationality of other actors in the world economy and does not explain the recent year long drop in gold and silver prices.  And if we were to investigate the "irrationality of other actors" in the world economy, we'd find there's one simple reason the US dollar has had a resurgence against precious metals (and other currencies)-

Western Civilization.

Understand that though the US and other western nations have massive economic and debt problems, they have one advantage over their non-western counterparts - we are more civilized.  By "more civilized" I mean precisely that.  WE don't have a ton of corruption say like, China.  We don't have to bribe officials like say, Russia.  We don't have people shooting each other in the streets say like, most of Sub-Saharan Africa.  And in general our population agrees and abides by our legal, contact, and economic laws (we pay people on time, we aren't trying to price gouge people at the local bazaar, etc.)  And when you compare these traits and factors to people with

trillions of dollars worth of their local currency
in a world where evil is winning in most places
and most other countries are kleptocracies

that disgusting, dirty, evil United States, with it's despicable dead, white European male culture, where those stupid westerners get up, day in, day out, go to work and do what they say they're going to do, still looks to be the best bet. 

This "trust premium" if you want to call it that has two effects.  One, it provides additional value to the US dollar above and beyond it's purchasing power or underlying economic production.  The dollar now becomes a "safe haven," or "reserve" for people around the world looking to just maintain the value of their currency.  Two, it increases the value of the dollar relative to other currencies, despite our horrible financial fundamentals in that we are the "least sucky currency" or as a reader put it, "the least ugly sister in the room."

"Sure," you might say, "I can see how this affects the exchange rates between the US dollar and other currencies, but why precious metals?"

And that is an outstanding economics question, one we can take a lesson from.

Understand that there is a difference between "price" and "value."  People often confuse the US dollar (or any currency) with value thinking currencies somehow have value.  In reality currencies are nothing more than units for pricing something that DOES have value.

"How much is that Big Mac worth?"  4.23 US dollar units of value.

"How much is that gallon of gas?" 3.97 US dollar units of value.

In other words a Big Mac or a gallon of has still has the same value.  A Big Mac will fill your stomach just the same whether the price is 5 cents or $500, and a gallon of gas will move your car the same 20 miles regardless of whether its price is 40 cents or $300 per gallon.  It is the CURRENCY'S PURCHASING POWER THAT CHANGES, not the value of the underlying good.

To this end you can see why gold and silver have dropped in price in terms of the US dollar.  Not because they went down in value, but because with everybody scrambling to park their assets in US dollars (and dollar denominated assets) the value of the dollar has gone up, allowing the dollar to purchase roughly 20% more gold and silver than it did a year ago. 

But once again, we need to look at the fundamentals.

Yes, it's nice that we have the least sucky currency.

Yes it's nice that CHina's bubble is starting to burst (not for the Chinese people, or for that matter, global economy, but for the US dollar)

And yes, it's really nice that the US "only" has 105% debt to GDP compared to Europe's 160% debt to GDP.

But we still suck.  And over time, unless there is genuine, booming and miraculous economic growth to provide the US dollar with genuine production/wealth-based value, you can expect the eternal law of supply to play out in the end and the dollar to drop relative to other items that have real or "intrinsic" value. 

Enjoy the decline!