The Dollar: Sliding or Crashing?

George Soros has clearly stated he is bent on breaking the dollar (Bretton Woods). Others globally, I’ve read, are already trading –even oil– without the US Dollar. The BRICS (Brazil, Russia, India, China, and now S. Africa) have called for the US Dollar to be taken off as the world reserve currency. And the IMF has stated that another currency type is being considered for the WRC.

When that happens, the demand for dollars would drop dramatically. Wouldn’t that incident alone devalue the dollar exponentially?

In light of all that, I’m trying to figure out how that meshes with the calmness toward the dollar in your article. I trade in the currency market as well, and I see the dollar losing ground straight across the board. The dollar makes mini-rebounds, but never to previously-held levels, at least that I’ve seen.

And if what you say is true, that the dollar could snap back violently, wouldn’t that mean a snap reversal for commodities as well (meaning gold, silver, oil, etc. would all plummet)?

I don’t mean to sound harsh, but the article gave me comfort–kind of like the string ensemble playing as the Titanic is sinking.

I always look forward to reading your post and appreciate the information contained therein. However I believe that some basic economic fundamentals are being overlooked in this article. As long as the Federal Reserve continues to expand the money supply, the long term outlook for the dollar will inevitably be DOWN. This conforms to the quantity theory of money which postulates that prices are a function of the ratio of the quantity of money in circulation to the quantity of commodities (dollars per pound of potatoes for example). When the quantity of money is increased faster than the quantity of commodities the purchasing power of money declines, which is simply another way of saying that prices rise.

I’m well aware that there are other factors which influence the rise in prices such as the objective exchange value, subjective exchange value, and the marginal utility value of money as explained in Ludwig von Mises’ book “The Theory of Money and Credit.” However, these have relatively short term effects on long term changes in prices.

From the beginning of our Constitutional Republic and the implementation of Hamilton’s First U.S. Bank, inflationary policies have been in effect and our government has been in debt. That debt was paid down to its lowest level during the Jackson Administration but the Civil War put an end to that. A significant part of that debt has been incurred by issuing fiat money which is simply a deceiving phrase for legalized counterfeiting.

Beginning in 1914 the trend in U.S. inflation (expanding the money supply) moved into high gear. For example, wholesale prices rose 126.7 percent between 1914 and 1920. This is documented in a book titled “Economics and the Public Welfare” by Dr. Benjamin McAlester Anderson who was economist for the Chase National Bank from 1920 to 1939. In Chapter 7 of this book, Dr. Anderson says: (parenthetic words added)
“Money in circulation and bank credit in the United States were enormously expanded as compared with the prewar (WWI) situation. Commodity prices were enormously higher.”

The “roaring twenties” were caused by the FED’s policy of inflating their way out of the 1920 -1921 economic crisis during which wholesale prices dropped 107 points in one year. Changes in Federal Reserve policy is what caused the 1929 stock market crash – not overproduction as the American people were lead to believe. Again, quoting from Chapter 26 of Dr. Anderson’s book:

“Alarmed, the Federal Reserve authorities reversed their policy in the winter of 1927 -1928. They sold Government securities. They raised rediscount rates.”

In addition to that they raised margin requirements for securities purchases and marked down loan values. This had the effect of forcing many speculators out of the stock market – thus it crashed.

Contrary to public opinion, the FED expanded the money supply during almost the entire 1930’s depression. This expansion was primarily in the form of purchases of government securities to fund socialist programs such as the “New Deal.” But hoarding of money by the people created the illusion of a scarcity. People were afraid of bank failures and loss of jobs and therefore kept their money in locked dresser drawers – like my father who lost his savings when the local farming community bank closed its doors. In other words there was no shortage of money but it wasn’t circulating and this caused prices to drop. Again, quoting from Dr. Anderson’s book:

“On March 12, 1933, at 10:00 P.M., the President delivered over the radio an address to the people, calling upon them to bring their money back to the banks, and assuring them that the banks which reopened would be good.
“Immediately upon reopening of the banks and immense volume of hoarded currency poured in upon them.
“The Federal Reserve Bulletin of May, 1933 (page 265), states that between March 4 and May 10 the total volume of currency returned was $1,595,000,000″.

Of course expansion of the money supply continued during WWII and has never completely stopped but there was a reduction of the rate of increase during the 1980s.

So what’s the point of all this? The point is that an enormous amount of fraudulent money has been created between 1914 and now. The thing that makes this confusing is that a lot of that money has gone into foreign hands and has been held out of circulation in the U.S. – more than $7 trillion due to the trade deficit alone. This does not include all the foreign aid or bank loans to third world countries. In other words there’s an enormous amount of dollars sitting in foreign hands which will eventually come back to our shores – it is already under way. If all that money had stayed in the U.S., the dollar would already be worthless.

There’s a delay between cause (expansion of the money supply) and effect (rising prices). In this case, almost a 100 year delay and this will blindside a lot of Americans. It should be clearly understood that once newly created money is injected into the economy, it is almost impossible to get it out again. It’s always in someone’s account, or possession, and banks can not simply take it out of people’s pockets. Therefore, deflation (reduction in the money supply) is very difficult and rarely happens. Contrary to popular opinion, a stock market crash does not create deflation if we define “deflation” correctly as a reduction in the money supply. But prices fall.

Socialists have succeeded in confusing our language. Calling rising prices “inflation” confuses cause and effect relationships. We “inflate” a balloon by injecting additional air into it; we “inflate” the economy by injecting newly created money into it. Injecting newly created money into the economy has many deleterious effects but the major is rising prices which steal from the producers by depreciating the purchasing power of the money they hold. When newly created money is injected, it competes with the money already circulating for an existing supply of commodities. Since the commodity supply has not yet increased, the additional demand drives prices up. Inflation is also a form of capital consumption which reduces our competitiveness in international markets at a time when we need to be very competitive. Yes, our export trade will be stimulated by the increasing foreign demand and our balance of trade will improve. Socialist economists will undoubtedly take credit for improvement in the trade balance, but the effects will be detrimental instead of beneficial. The money repatriated to our shores in demand for commodities will accelerate the rise in prices and everyone will suffer because of the depreciating purchasing power of the dollar. We already see this happening.

Deflation is the converse of inflation, it’s a reduction in the money supply, not falling prices. It’s true that deflation will cause prices to fall but so will a lot of other things. For example: hoarding money simply means that people reduce their purchases of commodities, this results in unemployment and falling prices. No deflation is taking place but real estate prices are falling. If we are confused about the meanings of words, we will be confused about the solutions to economic problems. In his great book “Human Action”, Ludwig von Mises was absolutely correct:

“What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflation.
“… While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse.”

The quantity theory of money is still in effect and when all the foreign held money comes flooding back to our shores in demand for commodities, securities, etc., etc., in addition to all the money Bernanke is creating, prices will skyrocket and the value of the dollar will plummet. As a matter of fact, we are presently most likely looking at the early beginnings of hyperinflation. If this is allowed to run its full course, it will be disastrous for Americans – and foreigners. This will be a world – wide catastrophe unless we stop it now.

Bryan, you may be right about a short term “dead cat bounce” in the value of the dollar, but unless fiscal policies of the government change, and the FED is abolished, the long term trend will be inexorably down.

Sorry about the lengthy response but I feel strongly that simple solutions to complex problems often exacerbates instead of solving them. This is a much more complex problem than indicated above and for anyone interested in obtaining a better understanding of money I would highly recommend Ludwig von Mises’ book “The Theory of Money and Credit.”

Your thoughts about these important issues are appreciated and I look forward to future publications.

Bill Denman

But I read somewhere, and it was a reliable source, that the Chinese Yuan is not “under-valued”. The analysis I read showed that the yuan is actually very much “over-valued” as it is! (mostly due to even greater stimulus in China than in the U.S.) Unfortunately that article made a great deal of sense and showed that claims of undervalued are not true. So overall these (contradictory) MoneyandMarkets reports are not helping much for trading.

“Barack Obama Described Himself as a Citizen of the World, Not a Citizen of America.”

As a detail of globalism in the emerging mindset as it reveals itself incrementally, the math is already worked out, so to speak; eco-numbers, economy. An ecology of currencies to be absorbed into one.