There’s Judy Shelton, who is on a roll writing terrific articles in the Wall Street Journal. Today she has published another stern reminder of the slow death of the dollar.
Unprecedented spending, unending fiscal deficits, unconscionable accumulations of government debt: These are the trends that are shaping America’s financial future. And since loose monetary policy and a weak U.S. dollar are part of the mix, apparently, it’s no wonder people around the world are searching for an alternative form of money in which to calculate and preserve their own wealth.
…But as the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade. Who wants to accumulate assets denominated in a shrinking unit of account? Excess government spending leads to inflation, and inflation plays dollar savers for patsies–both at home and abroad.
Her analysis of the looming federal debt fiasco is spot-on, and as she notes, the regime’s budget numbers do not include health care reform or the quietly proposed second stimulus package (or packages). Then there’s Timmy Geithner. In a discussion with the chief editor of China’s Caijing, Geithner stated that “investors have shown confidence in the U.S. government’s ability to maintain sustainable growth” and such confidence has helped stabilize the value of dollar assets. He dances around the issue of the diving dollar, and can only mutter such irrelevant filler as, “The dollar’s role comes with special burdens and responsibilities that require we are especially careful to sustain confidence in U.S. financial assets.”
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“the regime’s budget numbers do not include health care reform”
Let us not forget that the proposed health care reform is being advertised as reducing health care spending and hence the deficit. And we all know that politicians and their paid technical/academic advisors and handlers (including most of the media) would never, ever lie or exaggerate for political gain.
About the rise of gold relative to both the US dollar and the Canadian dollar, can anyone explain the following Canadian stats?
Base year: 1998.
Gold index (CDN$) = 100, housing index = 100, consumer price index = 100.
Year = 2005.
Gold index (CDN$) = 123, housing index = 170, consumer price index = 117.
Year = 2009.
Gold index (CDN$) = 249, housing index = 213, consumer price index = 125.
So it appears the price of both gold and housing have taken off stratospherically versus the consumer price index. However, it gets more interesting:
housing index = HI, consumer price index = CPI.
Base year: 1998.
HPI / Gold = 100, HPI / CPI = 100, Gold / CPI = 100.
Year = 2005.
HPI / Gold = 138, HPI / CPI = 146, Gold / CPI = 105.
Year = 2009.
HPI / Gold = 85, HPI / CPI = 170, Gold / CPI = 199.
So from 1998 to 2005, it appears that we entered a housing bubble as housing became significantly more expensive against both gold and the consumer price index. Gold stayed relatively close to the CPI.
However, from 2005 to 2009, what the heck happened? Now, housing is now cheaper against gold than it was in 1998!, while it has gotten more expensive against the consumer price index. Indeed, gold just about doubled between 2005 and 2009 against the consumer price index.
Does this mean that gold is significantly overvalued at today’s prices? Is anyone able to explain this?
Sources: http://www.bankofcanada.ca/en/cpi.html, http://www.research.gold.org/prices/, http://www.housepriceindex.ca
http://www.ecb.int/press/key/date/2009/html/sp091014.en.html
The chickens are coming home to roost. Think about this in the context of the current run up in the price of gold.
http://www.nypost.com/p/news/business/dollar_loses_reserve_status_to_yen_hFyfwvpBW1YYLykSJwTTEL;jsessionid=65E301CF47ED50D15170F8D6530791C5
Dollar loses reserve status to yen & euro
Excerpt:
Over the last three months, banks put 63 percent of their new cash into euros and yen — not the greenbacks — a nearly complete reversal of the dollar’s onetime dominance for reserves, according to Barclays Capital. The dollar’s share of new cash in the central banks was down to 37 percent — compared with two-thirds a decade ago.
Bernanke could go down in economic history as the man who killed the greenback on the operating table.
What I don’t understand is that Gold has enjoyed a huge run up on many currencies, not just the USD. If it was indeed just problems with the USD wouldn’t we expect just that currency to inflate in relation to gold? What is it that justifies Gold’s rapid decoupling from the consumer price index starting around 2005, in fact, what justifies its price rising so much that housing, while comparatively very expensive compared to 8 years ago, is now cheaper than gold?
George,
Recognize that economics is a behavioral science. You cannot answer economic problems with a formula. Segments of the economy will change at different rates depending on laws, public taste, trends, money supply, goods supply, inflationary or deflationary expectations, and on and on.
Also understand that prices are market evaluations of the current value of a thing. That means that at any point in time the price is the real value given the circumstances so there is no such thing as the market being oversold for example.
But that does not mean that you cannot forecast that in the future prices will rise or fall because current circumstances will change in one direction or the other.
Concerning various currencies and their relationship to gold. Gold is the constant. If a currency is depreciating relative to gold then it is probably because its supply is increasing. If another currency is depreciating faster relative to gold then it is probably because its supply is increasing faster than the other currency. Both can depreciate relative to gold at different rates.
…..by over-resuscitating him. (Charge…..Clear.…Charge…Clear …..….Charge…Clear…)
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