Dollar Debasement

[Gone4Good]

In case anyone is wondering, here is a chart for the Dollar Index since Bernanke first mentioned additional asset purchases by the Fed (QE2) on 10/4/10.

 

[brewer12345]

But I bet you are not wearing your tinfoil helmet, so "they" are manipulating you.

 

[MasterBlaster]

Ok the index started at 77 and is now around 80.

Was there some point you wanted to make ?

Or is this just a Chicken Little post ?

 

[Gone4Good]

Ok the index started at 77 and is now around 80.

Was there some point you wanted to make ?

Or is this just a Chicken Little post ?

It's a bit of sarcasm aimed at the Chicken Littles who warn(ed) of dollar debasement because of QE2 (and of hyperinflation, before that).

But it's also intended to inform. The media runs with a sensational story, so when the index declined from 78 to 76 all we heard was how the U.S. was manipulating its currency lower, and that the Fed was debasing the dollar. But now that the index has risen from 76 to 81, silence. I'd bet most folks didn't know the dollar index was higher today than it was before the QE2 announcement. I'd double down on a bet that says most folks don't know the dollar index is higher today than before all of the Fed actions began in 2008, but it is.

 

[MasterBlaster]

Gone4Good:

As you know the QE program doesn't operate in a vacuum. Lately we have the Euro-scare in Ireland and elsewhere and the Korean incident that has everyone fleeing to the dollar for "safety".

My personal take is that the QE program was modest at only $600B. The markets though are afraid of much much more of that sort of thing to come.

The jury though is still out on this one.

 

[Gone4Good]

The jury though is still out on this one.

And for some, it always will be. Here's a chart of the dollar index since the Fed's first rate cut on Sept 18, 2007 (from 5.25% to 4.75%). It's not obvious to me from moves in the dollar index over the past three years that the Fed has been too aggressive. It certainly doesn't look like the dollar has been manipulated lower.

 

[BigNick]

The recent rise in the dollar can also be mostly seen as a fall in the Euro, allegedly (fan of Taleb's "Black Swan here ) caused by the Irish bailout.

Absent rampant inflation, the dollar can only rise or fall against other currencies. Right now, nobody's in a hurry to revalue.

I'm quite happy for the Euro to fall a little. At least a third of my portfolio is in Euros and so I haven't been getting the full benefit of recent market rises as some of it has been taken away by the strong Euro. The emerging markets in which I'm exposed are off by 5% over the last couple of weeks, but I'm only down 2% there. (Yes, I know that this works both ways.)

 

[Gone4Good]

Maybe not all of the media is ignoring the dollar run . . .

Dollar Defies Skeptics as Best-Returning Asset in November

The dollar proved to be last month’s best investment, beating stocks, bonds and commodities, confounding officials around the world who said Federal Reserve policies would debase the U.S. currency. . . .

The gain in the Dollar Index brought its advance for the year to 4.4 percent

America’s currency rose even as Japan Prime Minister Naoto Kan said Nov. 4 the U.S. was pursuing a “weak-dollar policy” through its plan to buy Treasuries. Chinese central bank adviser Xia Bin said the same day the Fed’s policy amounted to “uncontrolled” money printing.

“Strong U.S. economic figures have helped the dollar,”

Go figure.

 

[Gone4Good]

The recent rise in the dollar can also be mostly seen as a fall in the Euro

Which is always the case with currencies, for one to rise another must fall.

At the same time, one might look at the troubles of the peripheral Euro zone members as one of a debt deflation cycle compounded by a strong Euro and fiscal austerity . . . the same kind of "remedy" being advocated here by the strong dollar crowd who expressed the most vociferous opposition to QE2. Working well, isn't it?

 

[BigNick]

At the same time, one might look at the troubles of the peripheral Euro zone members as one of a debt deflation cycle compounded by a strong Euro and fiscal austerity . . . the same kind of "remedy" being advocated here by the strong dollar crowd who expressed the most vociferous opposition to QE2. Working well, isn't it?

Not for Ireland, that's for sure. But the 800-pound gorilla of the Euro zone seems to like it: German business confidence at 20-year high.

 

[ziggy29]

Not for Ireland, that's for sure. But the 800-pound gorilla of the Euro zone seems to like it: German business confidence at 20-year high.

So what can be learned about what the Germans are doing economically to buck the trend? Most of Europe is in even worse shape than the U.S. in terms of economic trends, debt to GDP and so on. Germany seems to be the glue that's economically holding the EU together, at least for now.

 

[Gone4Good]

So what can be learned about what the Germans are doing economically to buck the trend? Most of Europe is in even worse shape than the U.S. in terms of economic trends, debt to GDP and so on. Germany seems to be the glue that's economically holding the EU together, at least for now.

Germany built an export economy which is rebounding with the rebound in world trade, along with emerging market growth. Unfortunately, not everyone can be an export economy, someone needs to import. And many of the EU's basket cases run significant trade deficits with Germany.

And yes, Germany may need a stronger currency to keep a lid on its growth in the same way that China wants a stronger U.S. currency. But what's good for Germany in this respect is terrible for Ireland, Portugal, Greece, Spain, etc. Just like the right monetary policy for China, is a terrible policy for the U.S.

What's funny, though, is that if you search this forum, you'll see the folks who were most opposed to QE2 posting quotes from German and Chinese ministers condemning the Fed action. As if they have the U.S.'s best interests in mind.

 

[ziggy29]

Germany built an export economy which is rebounding with the rebound in world trade, along with emerging market growth. Unfortunately, not everyone can be an export economy, someone needs to import. And many of the EU's basket cases run significant trade deficits with Germany.

Next question, then -- How did Germany build an export economy in an environment where so many good manufacturing jobs are being shipped to China and other cheap-labor nations? Seems like a nation trying to stop losing these good jobs can learn from it.

In other words, how is Germany able to export goods while much of the rest of the developed world is exporting jobs?

 

[FinanceDude]

Good ole Benny's plan will blow up in his face within 12 months or so. When inflation roars back, and the Fed starts raising interest rates, could be a real nasty situation...........

 

[MichaelB]

Next question, then -- How did Germany build an export economy in an environment where so many good manufacturing jobs are being shipped to China and other cheap-labor nations? Seems like a nation trying to stop losing these good jobs can learn from it.

In other words, how is Germany able to export goods while much of the rest of the developed world is exporting jobs?

It could be the partnership between business and labor, business investment in worker skill development and focus on employment stability probably helps. Labor is more cooperative and less contentious, and business executives are paid well but much less than in the US or UK. CEOs benefiting financially while workers suffer is also socially unacceptable. Maybe the fact that German business doesn't have to worry about health care insurance for employees.

On second thought, it can't be any of that stuff because that's all socialism and we know socialism doesn't work.

 

[ziggy29]

On second thought, it can't be any of that stuff because that's all socialism and we know socialism doesn't work.

But many of the other Eurozone nations are just as "socialist" if not more so, and their economies are in total shambles. So it's not the mere fact that they do these things, IMO; there must be other factors at work that are unique to Germany instead of things that are common to just about all of Europe that are setting it apart.

 

[MichaelB]

But many of the other Eurozone nations are just as "socialist" if not more so, and their economies are in total shambles. So it's not the mere fact that they do these things, IMO; there must be other factors at work that are unique to Germany instead of things that are common to just about all of Europe that are setting it apart.

The socialist comment was a bit tongue in cheek.

The business labor partnership which invests in and focuses on specific skills development and retention is not common to other parts of Europe and IHMO an important reason German exports are strong. Theirs is very much a focused value-add manufacturing, not low cost. There is really no reason it could not happen elsewhere and it likely does in the US but at a much smaller scale.

 

[Gone4Good]

Next question, then -- How did Germany build an export economy in an environment where so many good manufacturing jobs are being shipped to China and other cheap-labor nations? Seems like a nation trying to stop losing these good jobs can learn from it.

In other words, how is Germany able to export goods while much of the rest of the developed world is exporting jobs?

Maybe someone with a greater understanding of the German Labor market can chime in, but one way they've boosted competitiveness is by keeping wages low.

Look at Germany's nominal wage growth relative to the P.I.G.S. (especially Greece and Ireland)

Now for the P.I.G.S. to regain competitiveness (without the use of monetary policy) they need to reverse the relative wage gains they've enjoyed over the past decade or so. The problem is, they're too highly leveraged already and declining wages will only serve to make their debt problem worse. In a word, they're screwed.

 

[MichaelB]

It's difficult to compare labor costs across borders because tax policies and social costs are hard to equalize. Nonetheless, German labor costs are equal to or higher than it's top three trading partners (France, US, UK) which represent almost 1/3 of all exports.

German manufacturing is quite focused on specialized products with high added value that require skilled labor.

 

[HFWR]

Good ole Benny's plan will blow up in his face within 12 months or so. When inflation roars back, and the Fed starts raising interest rates, could be a real nasty situation...........

He's a chronic masdebasor...