Posted on 01/06/2009 6:58:15 AM PST by TigerLikesRooster
There is only one alternative to the dollar
By David Hale
Published: January 5 2009 19:01 | Last updated: January 5 2009 19:01
The great challenge confronting the foreign exchange market at the start of 2009 is finding a good alternative to the US dollar. One of the ironies of market events during 2008 was that the US financial crisis produced a flight to safety in the dollar. The dollar emerged triumphant from a financial debacle that centred on $1,300bn (€960bn, £890bn) of subprime US mortgage loans. The fallout has triggered a $32,000bn decline in global stock market capitalisation and driven all the Group of Seven leading industrialised countries into recession.
The dollar slumped against the euro during the final weeks of 2008 but fears about the financial system still drove US Treasury yields down to zero on three-month paper and less than 2.1 per cent on 10-year notes. This fear factor is likely to sustain demand for the dollar during the early months of 2009.
There is not now a clear alternative to the dollar because all big economies have slid into recession. Real gross domestic product could contract by 1.5 per cent in both the US and Europe during 2009 and by as much as 2.5 per cent in Japan. The decline in world trade and commodity prices will also reduce significantly the growth rates of the emerging market economies. South Korea and Taiwan are already in severe slumps. The growth rate of China could halve.
(Excerpt) Read more at ft.com ...
I think we could come up with a weighted basket of goods, actually backed by commodities on hand in a controlled environment. That would be more stable too, since any one commodity’s secular situation would not completely upset the entire monetary system (discovering 3X the gold in one go; Goldfinger irradiating it all, etc.)
I think we’re heading in the same direction. I just don’t want to end up in a world where I’m paid 1/10th of an ounce of gold for my year’s productivity. That is an unsustainable medium of exchange.
In a way, the market already does self select other media of exchange, witness the value of oil over the last year.
Also, think about a broad commodities fund as a parking place for ready capital. That may make more sense to an economic player uninterested in the vagaries of currency markets.
The world is getting more sophisticated this year. The USD is in trouble, and people will devise strategies to avoid being burned by that. I’ve moved some money into precious metals, REITs, TIPS, and Emerging Markets funds to diversify out of USD. I’ll do more over time. And so will others as they are burned by “fiat” currency.
That may be the final answer: People diversify out of currencies into stuff for ready capital. Long term capital is invested in the earning streams of companies that can react to currency fluctuations themselves. In that way, people can protect themselves from the Bernankes of the world.
Wisest post of the string.
I realize that, but as soon as something else becomes more appealing as a medium of exchange (whether the reason is gold’s unattractiveness or another commodity’s attractiveness), gold will be phased out anyway. That’s the beauty of the market not hindered by the government. People simply by their actions influence what the dominant money(ies) is/are.
I think people don’t realize that if we go on a gold standard now (or rather allowing the market to choose the medium of exchange), we won’t be forever beholden to gold.
Any gold standard will not sop up every bit of world currency. It will come as a parallel reserve currency. It will be one choice among a few other powerful world currencies
So oil will be bought and sold in terms of gold or dollars or rubles or yen etc. The stronger will survive and do better
It does to an extent, but without the status of legal tender, it is not an absolute medium of exchange because the government says it’s not and thus won’t accept it in taxes. With withholding and so much of our money going to the government, it’s almost impossible to use a different money as a medium of exchange across the whole economy.
As for the dollar’s fate, it should be interesting to see. The monetary base has increased many times over, but banks are far from fully loaned up. If they choose to fully loan up again (holding the legal minimum of 10% reserves) the money supply will explode, followed by prices.
Absolutely agree. The Fed could sop up that extra liquidity with interest rate increases, but they won't do much and will do so too late.
The other elephant in the room is the debt. Putting aside its sheer size and the fact it continues to suck up money that would otherwise got to the private sector, if interest rates spike up, which will be necessary to halt (or in this case, slow down) inflation, then the amount being paid to new owners of the National Debt will go up, further increasing the debt. This isn’t going to end well for us in my opinion. Could you imagine what would happen if the US defaulted?
There’s no doubt that it will be intriguing to see this unfold as an observer, but quite frightening as a citizen.
Dad? Is that you?
You sound just like my Goldbug Dad, who raised this Goldbug Girl. :)
Good reading, Thanks! :)
I sure hope I’m not your dad. 20 y/o with kids in college and ROTC... I don’t think I can handle that :)
I was never able to really respond to people saying “there isn’t enough gold,” until I started studying the Austrian School of Economics, if you’ve ever heard of it.
“Austrian School of Economics...”
I will look into it. Thanks for the tip! :)
Your posts are very well constructed and right to the point.
Of course, I understand what you’re talking about because ‘back in the day’...not many teenage girls spent their ‘allowance money’ like I did; buying coffee and cocoa futures, versus make-up and clothes at The Mall, LOL!
mises.org is a good website to get familiar with Austrian economics. It’s pretty libertarian and mostly anti-war, but generally they don’t get political and on economics, I think they’re sound. Some of the big thinkers have been Ludwig Von Mises, Murray Rothbard, and Friedrich Hayek. They disagree with Milton Friedman a lot mostly on monetary policy I believe. Austrian economics is very very free market laissez faire.
Well I hope you never got teased or bullied over buying things with actual value. There are definitely too many girls who spend money on things that don’t matter and I wish to God they had been rooted out by college... unfortunately IMO there are way too many partiers at college. Maybe I’m just no fun, but I am going to college to learn (and become an officer).
I spend most of my money on books outside of school (self learning is the best). Actually I probably spend more money on school text books just because each one is so incredibly expensive, but I have more books unrelated to school. I’m starting to buy silver and once I save up enough I’m going to go for the gold, so to speak.
“Maybe I’m just no fun, but I am going to college to learn (and become an officer).”
I’m retired Army. You are aces in my book. :)
Nice chatting with you! Keep in touch and “ping” me to anything you find here of interest, would you, Please?
I sure will. Thanks for your service.
1). Why do you assume that there must be exactly as much gold in circulation as there is in total GDP? If you consider my personal GDP to be my annual earnings, I can assure you that I’ve never kept 100% of any year’s annual earnings in gold (or in cash). Typically I spend or invest my earnings/GDP.
2). Why do “we” need any standard at all? In a free economy you would be free to open your own warehouse (aka bank) and charge people a monthly fee to hold their assets (gold, wheat, silver, oil, etc.). Your customers would then probably begin using the warehouse receipts for their assets as different mediums of exchange.
If your customers wanted to not trade their warehouse receipts in exchange for goods and services, but wanted instead to hold them (we call this “savings”), they might also contract you (or someone else) to lease out (aka lend out) their gold, etc. in exchange for some interest paid in gold and a return of principal. We call this “lending”.
There is no reason for any state to require its citizens to use a single national currency except so that they can inflate it and steal from their citizens.
LOL! If we do away with all those spendthrift females, we will also do away with most of our retail sector. Not much danger of that, since our advertising industry won't allow it. They let everybody know exactly what to buy and everybody buys it.
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