Is the dollar collapsing?
(MoneyWatch) One of my favorite sayings is from 19th century humorist Josh Billings: "It ain't what a man don't know as makes him a fool, but what he does know as ain't so." I'm persistently reminded about it when I talk to investors about their concerns. One of the often cited concerns is that our government's fiscal policy and the Federal Reserve's monetary policy have caused the dollar to collapse. So I thought I'd share the results of my review of the "videotape" and provide you with the facts (instead of allowing the fiction to persist).
The St. Louis Federal Reserve reports on the trade-weighted value of the dollar. At the end of February, it was 100.0. Five years earlier, it was 95.9. Thus, we can see that over the past five years the U.S. dollar's trade-weighted value actually rose about 4 percent. Taking a longer look, its value 10 years earlier was 123.0. That's a loss of about 19 percent. However, it was just 83.8 20 years ago -- that's a gain of about 19 percent.
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It's certainly true that our fiscal problems and the Fed's dramatic increase of its balance sheet from about $1 trillion to about $3 trillion create the risk of future inflation and a falling dollar. But the fact is that, at least for now, the dollar hasn't fallen dramatically in value.
Here's another related myth that persists among many investors. I persistently hear that the growth rate of our money supply is exploding. That belief has probably been fueled by those commercials that recommend buying gold because central banks are printing money like Weimar Germany all over again. The fact is that M2, a broad measure of the money supply, hasn't been growing at rates that would suggest rampant inflation should be expected. The following data is from the St. Louis Federal Reserve's web site and presents the last five years of growth in M2.
The compound rate of growth was 6.5 percent over this five-year period. Since, as legendary economist Milton Friedman noted, "inflation is always and everywhere a monetary phenomenon," the factual data doesn't support the view that we should expect rampant inflation. In fact, despite the views of many investors who seem certain that we will see massive inflation, neither the bond market nor professional economists are expecting anything of the kind.
We can at least get an estimate of what the market's forecast of inflation is by looking at the difference between the roughly 2 percent yield on 10-year nominal bonds and the roughly -0.7 percent yield on 10-year Treasury inflation-protected securities. The difference, 2.7 percent, is what's called the breakeven rate. The market's estimate of inflation is lower because some portion of the 2 percent yield of the nominal bond is a risk premium for unexpected inflation. At any rate, investors in aggregate don't appear to be concerned about rampant inflation. As to the forecast of economists, the Philadelphia Federal Reserve's First Quarter 2013 Survey of Professional Forecasters has a 10-year forecast of 2.3 percent. Again, they don't believe rampant inflation is likely, let alone inevitable.
Don't get the wrong idea. There certainly is risk that inflation could increase dramatically and that the dollar could fall sharply. And a well-developed investment plan should incorporate the possibility of those events happening, addressing them through the asset allocation process. For example, the more you're exposed to the risks of unexpected inflation, the more you should consider holding TIPS and short- to intermediate-term nominal bonds, avoiding long-term nominal bonds. And if you're more exposed to the risks of falling U.S. dollar, you should consider a higher allocation to international stocks through a broadly diversified low-cost, passively managed fund that also doesn't hedge the currency risk. (You want that currency risk.)
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Nuff said... buy gold silver or bitcoins.
As to that quotation, if that was reality, then why has the dollar risen slightly over the past 5 years? And the Obama administration will be gone in a few years. And they don't control monetary policy which has a significant impact on the dollar.
The bottom line is yes, there is the risk of a dollar collapse if the problems are not corrected. And one should build that risk into how you allocate assets. But I remember all the same things you said were being said in late 70s under Carter and gold then collapsed almost 90% in real terms over the next two decades.
Best wishes
Larry
I plotted the trade-weighted values of 'interesting' currencies, taking publically-available data from the Bank of International Settlements. The graph from Jan 1963 to Dec 2012 is available here --> http://s1.directupload.net/images/130314/imjtg9w7.jpg
There are, of course, up and downs but the trend is clear to see. Also the rise of Japan from the early 1960s on. Unfortunately we don't have this data for China but I'd certainly expect to see a steady up tick of the RMB over the last decade and for that to continue at the USD's expense over the next quarter century.
Best wishes
Larry
That is simply not true as I pointed out. If you were correct the money supply would be growing at much faster rates than 6.5 percent.
And there are many products, ones people don't tend to focus on, where prices are falling, like all kinds of electronics.
Best wishes
Larry
in 2008, M2 = $7586. In 2013, M2 = $10413.
10413 - 7586 = 2827
2827 / 7586 = 37%
In 5 years, M2 has increased 37%, equating to, I guess, a compound rate of 6.5% per year.
So if bread costs $1 in 2008, then it costs $1.37 in 2013, all other things being equal. Except all other things aren't equal. Our dollar is worth more in 2013 than in 2008, according to the article.
No sign of inflation there, is that what I am to understand?
The dollar trade weighted index is a measure of the value of the dollar RELATIVE to the currencies of our trading partner. That value has gone up about 4% over the last five years.
The value of the dollar over the period, in terms of spending power in the US has fallen over the last 5 year by 1.8 percent a year, the amount of inflation.
I hope that is helpful.
Best wishes
Larry