Tuesday, June 11, 2013

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!


Phillyastro said...

Very true. Of course, hiding your assets in U.S. Dollars will only make sense as long as we follow the values of Western Civilization. I think we are thinking of allowing a few folks into the country who are unfamiliar with the ways of Adam Smith, Jefferson, von Mises, and Hayek.

Pat Sullivan said...

The "trust premium" and reserve currency status, are definitely having a positive effect on the US dollar. These factors, help to mask over the economic fundamentals.

This also happened to the British Pound shortly after WWI. The prestige of the British Empire, helped to carry the value of the Pound during the early 1920s. Britain held massive war debts and her Empire was collapsing. Yet the value of the Pound stood strong. The Pound had been the leading currency for the last century. Well surprise surprise, eventually the fundamentals kicked in. The British Pound was forced off the gold standard. Currency/capital controls were soon to follow. The British economy went into a long decline and never recovered.

Sooner or later, the world will wake up, and realize the US dollar is no longer based on a sound economy. In the meantime, enjoy the ride.

Anonymous said...

You have the basics right and you hint that there is more complexity involved. For one thing, the gold and silver markets have been highly marketed to speculators, inflating their prices relative to paper money in the past ten years. It is only natural that their prices would recede as the bubble eases. Further, our government prints the money (digital printing now since there is no way for paper money to keep up) and then exchanges it for bonds. The money goes to the banks to lend out. But lending depends on a willing borrower to put his own capital at risk and in this current economic climate, few are willing to do that. So the money doesn't get borrowed. So it doesn't circulate. So it arguably doesn't in effect get added to the money supply even though it is added to the supply on the balance sheets.

KevinB said...

Don't know that it's the 'least sucky', but it's more a case that the US gov't has been the 'least confiscatory'. Except in times of war, the US has never come close to the 95%+ income tax rates that, say, France and Britain have imposed on their citizens. No capital controls on movement in and out of the country (yeah, you have to report it, but you can still do it.) For people in the Philippines, Argentina, Zimbabwe, and many other countries, the US$ holds purchasing power when their local currencies don't.

However, there are a whole host of us who believe this is merely the latest version of that old story, "The Emperor's New Clothes". While the Bernank may try to paper over (sic) the problems with the US economy, many of us believe the truth will eventually out. Look out below!

Anonymous said...

Any thoughts on whether the Bitcoin (BTC) could ever supplant the USD as the global currency? Myself, I can't see it happening, though BTC boosters say it is the wave of the future, it is anonymous (supposedly), etc. The issue as I see it: even if people could use BTCs, why would they bother when they can use USDs? The USD is already the global currency, and if it goes mams up, good luck keeping the power on where you are so you can play with your digital currency.

Peregrine John said...

Yeah, it's a giant, bizarre shell game. Makes my head hurt.
Or other parts. YMMV

Aerodawg said...

The decline in price of precious metals relative to the US $ just means they're on sale as far as I'm concerned.

The value of my metals stash has no bearing on my day to day solvency so therefore, in this one instance, I can in fact stay solvent longer than the market can stay irrational.

Fred Z said...

Don't forget the associated gigantic, huge productivity of western culture.

Sure the Chinese can build huge sweat shop factories to produce nearly anything in massive volumes, but they are usually doing so at a net societal loss. It's the classic case of dumping benefiting the dumpee much more than the dumper, who actually loses.

Meanwhile, the average Chinese is as productive as a stump, even if he's a bright hardworking guy. That's because he spends a thousand percent more time then we do defeating bureaucrats, thieves, politicos, banditti, (but I repeat myself) internal tariffs and has almost no personal or societal infrastructure to help him. He's scratching the earth with a stick where we are using a John Deere 9630 with 530 horse-power.

So the foreign investor says to himself: "Hmmm, put my money in the nation of the unproductive peasant, or the well equipped, energetic, entrepreneurial, trustworthy, dude?"

Answers itself.

Unknown said...

I was beginning to think that gold and silver were bubbles in themselves. It seems a bit uncertain whether they will continue to trend downward for a little while or stay the way it is right now.

What do you think of the dollar index measure? According to Bloomberg, the dollar is at around 81.2. This comment from another blog could also explain the lack of inflation or deflation right now depending on how you wanna look at things.


Anonymous said...

a few comments:
First, bitcoin isn't going anywhere. Denninger at Market Ticker has a great article several weeks back explaining why. Excellent article, must read.

Second, gold has usually not been a good inflation hedge. Rather it's a hedge against the failure of confidence in a currency. At the moment, the dollar is ugly. But it's the least ugly currency in the world. And its debt market is second to none in the world.

Third, read Martin Armstrong some time. He has a lot to say about the role of capital flows between countries and continents. His essential thesis is that capital will flow like water to where it's treated best. At the moment, that appears to be the US and Asia (Japan in particular).

Yes we have inflation, but it's not severe inflation because there is no upward pressure on wages. Too much competition there... Not like the late 70's.


OregonGuy said...

I've lost thousands in the last few weeks. Well, let's say, tens of thousands. But I'm not selling the asset.

Here's the deal. If my assets end up costing me tens of thousands,that means my equity investments are earning me beaucoups. I don't need a derivative to hedge. Gold is the ultimate derivative. I will willingly lose every drop of value in gold, if that means that our federally directed economy is gaining strength in ways we've never before experienced.

Waiting on my equity holdings. Waiting for gains from federal regulation kicking in. I understand that we'll all be better off after Obama.

Well, could. Prolly won't. And, that's why I own and hold.

Anonymous said...

I'm buying another gun.

ARoss said...

I was wondering, if you were just starting to invest in stocks would Amazon be a good option?

Anonymous said...

I can play a real magic trick and have the US dollar backed by a huge surge of hard assets to keep the printing press going on in perpetual motion !!!!

sth_txs said...

Yep, Jim Puplava at Financial Sense says we have best looking worst house in the neighborhood of currencies.

I can't say that makes me feel any better.

Anonymous said...

"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."

I am going to change that law, you will face the law of eternal supply.

The US Dollar is NEVER going to die and neither will the US empire !!!

Donttreadonmatt said...

It's a little frustrating to see you buy in to government statistics like CPI, and the fraud that is the paper precious metals market, when making your case. I'm sure you know how the calculation of CPI has changed over the last few decades to lessen the real impact of inflation, and how each ounce of PMs have been leased and sold many times over, and the vaults that allegedly support the paper pm contracts do not have enough PMs to satisfy the contracts. While the western civilization effect may have some small influence on where money flows, manipulation is the name of the game today. Bennie and the boyz want you in stocks, and with a printing press, they can manipulate markets at will to force you into stocks. We have no free market today. The paper price of gold plummets while physical demand soars? That is against all laws of economics, the very basics of supply and demand, and to claim that it is because the dollar strengthened is absurd - it is because the paper markets are a fraud, in everything. Most of the volume on the stock market is traded via computers and algos - HFTs - so even attempting to rationally explain these markets based on economic principles will not explain reality. Bad news, and stocks go up, because the market assumes that Bennie will keep printing. The markets are fake. Anyone playing in that sandbox needs to sleep with one eye open and have their finger on a hair-trigger, because once those doing the manipulating decide the ride is over, the ordinary investor will be the last one to know and left holding the bag. Enough mixed metaphors for ya?

Ziad said...

The Golden Fall of the U.S. Dollar:
Would you rather have gold or dollars? People around the world are asking this question more and more as we enter the year 2012. In fact, Donald Trump already accepts gold as a form of payment from tenants in one of his buildings because Trump believes the U.S. Dollar is losing its value and its status as a credible international reserve currency.
Ziad K Abdelnour

Christopher Woerner said...

The dollar isn't a sensible unit of currency because it can be so easily manipulated by blowjobs. How much is a hamburger, fries and a drink? One blowjob. How much is a bag of weed? One blowjob. How much is a car ride home? One blowjob. How much is a new outfit? One blowjob. How much is an ounce of crack? That can run to several blowjobs, but they don't have to be with the same person. And then there are those who aren't interested in paying for something with a blowjob in the first place. What do you do with freaks like that?

Green Grass said...

I agree with you that the US is not that bad. When I returned from living abroad, although I had a long list of reasons to leave, I was nonetheless shocked by all the negativity and doom-n-gloom naysayers I found in the Manosphere.

Sure, American culture is shallow and trite with no deep philosophical underpinnings, but I've always found most of my fellow Americans to be friendly, and that kept me positive.

I still find most Americans, the ones I meet and mix with anyway, to be open minded and friendly, even if not intellectual giants or wise Himalayan sages.

Also I see the future as BRIGHT.

Just in the decade and a half I've been gone there has been a huge shift and Americans are for the first time become somewhat deep and philosophical thanks to the presence of South Asian wisdom traditions and like Buddhism, Vedanta, Yoga, Tao and the like.

All of that is only going to increase over the next millenia so I feel confident and happy about American culture's future, even if I didn't feel happy and confident about it's cultural (or lack thereof) past.

"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.)"

Well, I LOVE to haggle in the bazaars. Believe me, you do not get "cheated" any where near the extend the corporations rip you off over here.

And I much prefer paying a cop off on the spot with a mere 100 rupeya than going through the headache of getting a whopping 200 American dollar ticket and either having to waste a day in court or pay the damn thing (which I can't afford).

In short, I'd like to take the best aspects of all the countries I've lived in and create a Utopia.

Since that might not happen, I am happy to notice and appreciate the good everywhere I go, and simply to do my best to ignore the bad.