The Value of the Dollar

This week’s Up and Down Wall Street looks at a recent analysis out of QB Partners. They are a hedge fund run by Lee Quaintance and Paul Brodsky.

QB put together an analysis of the US dollar, and why its ongoing wekaness is both significant and ongoing. In their analysis they see the buck ultimately endingits run as the world’s reserve currency.

The heart of the analysis is the quandry left for the current Fed chairman Ben Bernake by new PIMCO flack and former Fed Chair Alan Greenspan.

Poor Ben is confronted with a long term Hobson’s choice: tighten the monetary and credit screws to
bolster the dollar, go the other way — loosen credit and lower rates even further to prop up asset
Why is this no choice at all? Because History has taught us the Central Bank will continue to "inflate the money
supply and promote more credit, thereby sustaining asset prices at the
expense of the purchasing power of the dollar."

Here’s an excerpt:

"That may seem the downward path to financial and
eventually economic rack and ruin. But such a trivial consideration has
never deterred Washington. You don’t have to swallow whole QB Partners’
gloomy diagnosis and prognosis for the beleaguered buck to find it
valuable as well as provocative. Even though we agree there’s plenty of
sliding room left for the greenback, we’re not convinced the outlook is
as apocalyptic as the duo contends . . .

The pair point out that the vigorous monetary
inflation manifest in the 30% decline in the value of the dollar in the
foreign-exchange markets since 2002 is seeping inexorably into the
economy: "Prices paid in the U.S. for goods, services, financial
assets, real-estate assets and natural resources have risen in recent
years significantly more than population growth and organic demand."

They then cite the findings of Shadow Government
Statistics, an independent research outfit, that "U.S. prices have been
increasing at annual rates ranging from 8% to 11% since 1996. This
contrasts with the Bureau of Labor Statistics’ core CPI, which has
risen in the 1.5% to 4.5% area."

And they comment drily that most Americans likely
"intuit their rate of inflation more in line with the higher
‘unofficial’ rate than" the conveniently low numbers calculated by the

Timely, too, is their take on our increasingly
leveraged markets, the inevitable result of all that cash and credit
the government is so sedulously pumping into the economy. "Levered
funding," they warn, "gives the public markets an embedded tendency to
fall faster and harder than they otherwise would."

Leverage, they point out, enters markets leisurely
but can exit quickly and violently. Might keep that in mind when some
shill next tells you there’s just too much liquidity around for stocks
to ever go down."

For those of you who prefer Happy Talk to chatter of this sort, there’s always USA Today . . .


The View From Mars
Alan Abelson
Barron’s May 21, 2007      


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What's been said:

Discussions found on the web:
  1. s0mebody commented on May 19

    I just don’t see how the dollar can survive. According to David Walker, U.S. comptroller general, we have $50 trillion in future liabilities we either aren’t going to pay (don’t think that’s likely), or we just print to pay. This is the part of the puzzle I can’t figure out. I see two scenarios, deflationary credit contraction or Mises “crack-up boom”. With markets raging right now a crack-up boom seems real, but can this really continue?

  2. gonzo commented on May 19

    I’m more than a little bit surprised that most Americans ‘intuit’ much of anything, let alone something complicated and mathy like one inflation rate vs. another. This sounds like one of those Econ101 ego stroking ideas about how rational and value-maximizing we are…

  3. Scott Teresi commented on May 19

    I wonder what mechanism is actually stopping the dollar from falling further. It has hit very long-term historical support and I imagine it could be hung up there for a good while.

  4. Leisa commented on May 19

    Well, Jim Cramer tells us on Real Money that not much really happens when bubbles burst–for the life of me, I cannot fathom why he would write such a thing. But, it’s a free market of ideas; unfortunately there is not a Good Housekeeping Seal of Approval operating in that market. And there are so many opinions about, it is becoming harder and harder to be a discerning consumer of them.

    On the one hand there is much to dread and anticipate and on the other hand we have the great financial lubricant called liquidity–when that dries up the ride will get decidedly rougher. Unfortunately, there are so many tea leaves to read, and so far they’ve all proved to be stuck to the bottom of the cup in no discernible pattern.

    I’m watching the American consumer. They will become the iconic linchpin in the entire world’s economy. If (but I think more honestly it is when)their knees buckle (despite those credit braces they have strapped on)so will the world’s economy. So the “little guy/gal” (and that includes me) will realize how much power they really have. Unfortunately, that realization is concurrent with their demise. For all of their admirable shouldering of not only our economy but the world’s they’ve not much to show for it but increasing debt loads and pay increases that have barely kept of with the real inflation that they face every day. Remember, they are still paying for the last bubble pop when excess liquidity pushed housing prices above the local norms and the local pay.

    This situation stands in stark contrast to the CEO pay excesses, corporations rolling in so much cash with so few opportunities (some one-time bonuses to employees who helped build that is a terrific use of cash too, though I’ve not read one talking head say that)that they are buying stock back and the financial professionals tomfoolery at the expense of erstwhile investors who do not have the benefit of inside information.

    Sorry for the soap box post, but I’m really feeling disgusted by what I read everday and the tally of who has gained v. who has lost ought to raise the ire of a person or two.

  5. donna commented on May 19

    Can’t pay employees more – that would cause inflation. ;^)

  6. commented on May 19

    More US Inflation than Government Data Lets On?

    Barry Ritholtz: This week’s Up and Down Wall Street looks at a recent analysis out of QB Partners. They are a hedge fund run by Lee Quaintance and Paul Brodsky. QB put together an analysis of the US dollar, and…

  7. PC commented on May 19

    Charlie Munger in his speech “Wordly Wisdom” taught the principle of objectivity. And he said to remain objective and to avoid becoming the man with a hammer (everything looks like a nail), always “invert”.

    Since everyone is convinced that there is no way for the Dollar to go but down, let’s invert.

    From the technical view point, what about the possibility that the Euro has made a long term double top at 1.36 (first top in Dec. 2004 and the second top in April 2007).

    For Dollar Yen, after all the apocalyptic talk of squeezing the carry trade, it is now gunning for the 122 level again. If it can breakout of 122, then the long term upside within the next 3-5 years is 135.

    Sounds lunatic? Well at the stock market low in October 2002, if you make a prediction that the Dow would be at 13,500 in five years time, people will think you are a luny bin, especially in light of “gurus” like Bill Gross predicting Dow 5000.

  8. Estragon commented on May 19

    PC – you may well be right. As well as the technicals, it may help to keep in mind that the fed isn’t the only CB in the world with access to a printing press and helicopters.

  9. John Thompson commented on May 19

    Word. Estragon said it. Inflation is higher as Barry and others have pointed out. Shadow data is real data.

    Prices will keep going up. We’re paying to be in a world develoopment/liquid bubble with very high fees to finance our world investing class.

    I’ve come to conclude/hope there isn’t going to be a meltdown. How could the rich milk us more?, which I’ve concluded will also be good for their foreign portfolios with us financing the world and them loopily financing our continuance.

    Good thing is, we grow along with our debt?

    Leverage = fractional reserve system, just a bigger mortgage on world development. 70 trillion in debt is possible. It’s where we’re headed. Will we match it with growth to make the payments? If not, meltdown.

    And, are there guys who step in during crisis?

  10. m3 commented on May 20

    I wonder what mechanism is actually stopping the dollar from falling further. It has hit very long-term historical support and I imagine it could be hung up there for a good while.


    fear is keeping the dollar up.

    every bank knows that if the dollar craters, it’ll take them with it. to allow that to happen would be financial suicide.

    it’s in everyone’s best interest to let this fall so gradually that no one will notice.

  11. Scott Teresi commented on May 20

    fear is keeping the dollar up.

    it’s in everyone’s best interest to let this fall so gradually that no one will notice.

    This might make sense for banks and governments. But for regular investors, why should they prop up the dollar? That’s like saying investors in Amazon are propping up the share price to keep the company healthy. They wouldn’t do that… they’d sell it or short it and make lots of money on the transaction until it’s brought down to its perceived value. Does this not happen in currency markets?

    Who really “controls” exchange rates?

    My very uninformed hunch is that the dollar still has a perceived intrinsic value, in a diversified portfolio of currencies. Could fear be drawing people to the dollar, as the historical safe haven in the event of a recession?

  12. Macro Man commented on May 20

    If people intuit their “true” rate of inflation, then presumably that intuition colours their expectations of future inflation. The fact that inflation expectations from, say, Friday’s Michigan consumer confidence survey, were just over 3% might therefore suggest that the US inflation data may be less flawed than commonly supposed.

    Using US money supply growth as an explanatory variable for the dollar’s weakness ignores the fact that currency prices are relative, not absolute. Money supply growth in other countries must also enter the equation if one chooses to believe that relative money growth determines foreign exchange rates. In fact, those currencies that have fared well against the dollar (€, £, AUD, RMB, etc) are generally from countries with even stronger money growth than the US. Japan is a notable outlier; its money growth is very slow, and its currency is even weaker than the greenback.

    Someone asked above why regular investors should prop up the dollar. The answer is that they are not. The vast, vast majority of the US current account deficit has been funded by foreign central banks, primarily oil producers like the GCC countries and mercantilists like China.

    Anyone who claims that the dollar will lose its reserve status must offer a reasonable alternative currency or an explanation as to why foreign exchange reserves will disappear. The US and Europe are the only two currency blocs with asset markets deep enough to absorb the volume of reserves that are being accrued every year. While the euro may well eventually become a co-reserve currency (it is nearly halfway there already), it is difficult to envisage it superceding the dollar given the inherent political risk in the enterprise.

  13. Estragon commented on May 20

    Macro Man – Wouldn’t relative currency values be based more on expectations for future money supply growth than on recent historical growth.

    For example, one could credibly argue that there’s an expectation that Europe and Britain are likely to continue tightening, whereas the expectation that the US and Japan will do so is relatively weaker?

  14. Amateur commented on May 20

    What keeps the dollar from falling is the simple fact that it is already cheap. Ofcourse it can also get cheaper in a panic run, but absent that, equilibrium is close to 1.15 dlrs for one euro, it will eventually turn to that direction.

  15. Macro Man commented on May 21

    Estragon, I personally don’t think money supply is a particularly useful determinant of exchange rates. In any event, the capital flow impact of tighter rates has a much more immediate and powerful impact on currencies than any notions of the future trajectory of money supply growth.

  16. beatriz commented on May 24

    does anyone know where i can read the whole QB analysis?

  17. John the Bookman commented on Jun 6

    I would like to read the QB Partner’s article in it’s entirety. Can you post a link?

  18. tin man commented on Oct 18

    The Flaw of Capitalism

    What is Capitalism?

    The American-Counter-Revolution has derived its “definition” of Capitalism from the book Capitalism For Beginners, Robert Lekachman and Borin Van Loon, 1980, pages three and four.
    The reason for this is very simple and basic. In 1980 Robert Lekachman was the Distinguished Professor of Economics at the City University of New York. City University of New York (used to be City College of New York) has played a central role in the Permanent Revolution (and the generation of many Conspiracy Theories). Lekachman’s definition/basic description of Capitalism is very simple and at the same time very precise and remarkably correct.

    “The bare, basic essentials of Capitalism are these”:
    Capital is the portion of a nation’s wealth that is man-made and therefore reproducible. (Emphasis in the original)
    Under Capitalism, a society’s capital equipment, its means of production, is owned by a minority of individuals who have the legal right to use this property for private gain.
    Capitalism relies on the market system, which determines distribution, allocates resources and establishes the income levels, wages, rents and profits of the different social classes.
    There is more to Capitalism than that. It can refer to an economic system, the society built on it and a historical stage of Western, First world, civilization.

    The trouble is, can we trust any economist to tell us the truth about Capitalism? Capitalism has continually suffered and overcome, crisis…Inflation contributes to the instability of financial markets, trade imbalances and the financial crisis of the state.

    The Flaw of Capitalism is most obvious in the above quote. Take a few minutes and compare Lekachman’s Rule #1 with the last quoted sentence.

    Capital (money) is man-made and reproducible. Inflation contributes to instability in markets and creates financial crisis for the State.

    In the American Republic its Capital (money) is created (printed by the US Treasury) and then controlled (distributed) by the Federal Reserve. Do you see the problem?

    Inflation contributes to instability. “Capitalism has continually suffered and overcome crisis.”

    Capitalism can not exist without inflationism…Capital that is reproducible/man-made…money.

    What is Inflationism?
    This is a most simple, legitimate and logical question to ask.

    According to Webster’s Seventh New Collegiate Dictionary, 1963 (The American-Counter-Revolution uses this dictionary for the vast majority of word definition) “Inflationism” is simply defined as follows,

    “The policy of economic inflation.”

    Simply stated, the printing of money. Remember money/capital is man-made/reproducible.

    Capitalism can not survive without Capital…money. The Capital…money must come from somewhere. Maybe we need to look at the variety of words based on the base word “inflate”.

    “To puff up, to expand or increase abnormally.”

    So Capital/money by definition is “inflatable.”

    “Capable of being inflated.”

    So our Capital/money supply is “inflated.”

    “Expanded to an abnormal or unjustifiable volume or level.”

    If Capital/money is inflated this must lead to “inflation.”

    “An act of inflating, an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level.”

    Yes…Capital/money…reproducible, man-made wealth…is “inflationary.”

    “Characterized by, or productive of inflation.”

    And if you have been paying close attention, it is obvious this leads to “inflationary spiral.”

    “A continuous rise in prices that is sustained by the tendency of wage increase and cost increases to react on each other.”

    And of course this brings us all back to inflationism…of which Capitalism can not survive without its existence. Do you see the problem yet? Economists can not tell us the truth about Capitalism. What is that truth?

    Simply stated., by its very nature Capitalism creates its own demise in its pursuit of survival… overproduction and under-consumption…The Flaw of Capitalism.

    The Flaw
    The Flaw of Capitalism has been observed by several well acclaimed intellectuals and economists over the last 200 years. This list includes Adam Smith (18th Century), Karl Marx (19th Century), and Joseph Schumpeter (20th Century). Yes all three men…separated by space and time..made the same basic observation about Capitalism. What is this unified observation?

    Adam Smith’s analysis was not based on any kind of data collection (Smith was a philosopher). Karl Marx was also a philosopher and like Smith his conclusions were not based on any kind of collected data. In contrast Schumpeter was a data-driven researcher. Schumpeter was an economist not a philosopher. Smith and Marx made the same exact non-data-driven observations about the Classical Theory of Economic Development (from The Second Industrial Divide, Piore and Sabel, 1980, page 22)

    “The specialization of manual work whatever its immediate impact on productivity was decisively important because it led to the introduction of special-purpose automatic machinery. Once a human task had been decomposed into its elementary motions, it became possible to build a device that would perform these motions automatically, and as one step of a manufacturing process was thus mechanized, the preceding and following steps had to be correspondingly reorganized to keep pace with the new machinery.”

    Schumpeter’s data-supported observations on The Classical Theory of Economic Development, from his Capitalism, Socialism and Democracy (pages 82-83), goes like this,

    “The essential point to grasp is that in dealing with Capitalism we are dealing with an evolutionary process. It may seem strange that anyone can fail to see so obvious fact which moreover was long ago emphasized by Karl Marx…Capitalism, then, is by nature a form or method of economic change…this fact is important and these changes (wars, revolution and so on) often condition industrial change…The fundamental impulse that sets and keeps the Capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms or industrial organization that Capitalist enterprise creates.”

    Now comes the major problem that Smith, Marx and Schumpeter all recognized. (from The Second Industrial Divide, page 23)

    “Obviously, it made no sense to rearrange the production setup to increase output if there was no market for the increase and the rearrangement made it expensive to switch the resources to some alternative purpose.”

    Do you see the problem? The Marketplace only works if there is enough money in the hands of the people (the Marketplace) that do not own the Means of Production to purchase what is made by American/British Capitalism.

    Creative Destruction (Capitalist Expansion) will not work if there does not exist a currency in sufficient quantity for the masses in the marketplace to support its expansion. The End of National currency

    International Communism is impossible without the prior-existence of an International Socialism.

    International Socialism is impossible without the existence of a International Capitalism as the sole means of production for Planet Earth.

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