American • Why the U.S. Dollar Is Not Going to Zero Anytime Soon

Why the U.S. Dollar Is Not Going to Zero Anytime Soon

July 23, 2012

The market considers a variety of inputs in pricing the value of a floating currency. The dollar has more going for it than is generally understood.
The conventional view looks at the domestic credit bubble, the trillions in derivatives and the phantom assets propping the whole mess up and concludes that the only way out is to print the U.S. dollar into oblivion, i.e. create enough dollars that the debts can be paid but in doing so, depreciate the dollar’s purchasing power to near-zero.

This process of extravagant creation of paper money is also called hyper-inflation.

While it is compelling to see hyper-inflation as the only way out in terms of the domestic credit/leverage bubble, the dollar has an entirely different dynamic if we look at foreign exchange (FX) and foreign trade.

Many analysts fixate on monetary policy as if it and the relationship of gold to the dollar are the foundation of our problems. These analysts often pinpoint the 1971 decision by President Nixon to abandon the gold standard as the start of our troubles. That decision certainly had a number of consequences, but 80% the dollar’s loss of purchasing power occurred before the abandonment of dollar convertibility to gold.

The depreciation from 1971 on looks rather modest on this chart. Clearly, dropping the convertibility of the dollar to gold did not change the overall depreciation dynamic much; the dollar had been losing purchasing power since the turn of the century.

cont

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Statistics: Posted by yoda — Sun Jul 22, 2012 2:15 pm