The Dollar May Not Be Doomed

The consensus is nearly universal that the dollar is doomed. Perhaps there are other forces at work beneath the surface.

It seems a given now that the U.S. dollar is doomed to either slow depreciation or devaluation. Perhaps--but the consensus seems too easy. Yes, money supply and liquidity have exploded as the Fed and Treasury fight deflation, and yes, history suggests expanding the money supply debases the currency.

That the dollar has been debased is clear enough if we measure the dollar's value in gold. Priced in gold, the dollar has lost over 2/3 of its value in a mere decade. Courtesy of contributor Harun I., here is a chart of gold:

Where it took less than $300 to buy an ounce of gold in 2001, it now costs about $1,000. Thus the dollar has lost 70% of its purchasing power when priced in gold.

Correspondent Jim S. observed that this depreciation has been a trend for the entire 20th century:

At the barbershop, the barber asked me if the dollar was at risk of failing. The dollar is not at risk of being wiped out, IT ALREADY HAS BEEN WIPED OUT, and the world is moving on. From 1789 to 1912, the dollar appreciated a full 11%. From 1912 to 2001, it has lost 95% of its value under the fractional reserve banking system of the Fed Reserve, massively overleveraged further since the inventive application of credit derivatives since the ‘90s.

In 2001, a dollar index of $1.2 (as charted by the Dollar Index) existed and now it is at about .76. This recent drop results in a dollar loss greater than 95% from the 1912 value. The dollar HAS been destroyed in the proper historical perspective!

A world-wide move underway, recognizing that the dollar is now unsustainable as a reserve currency, to a new form of reserve currency/currencies, will take some time, and, our dollar will remain as the reserve currency for a while as something new emerges. Regional currencies may evolve in the meantime: Yuan? AMERO? EURO? A worldwide, single, unified currency is too utopian for applicability.

Regional currencies have yet to be proved sustainable either. We are in limbo with a sinking dollar. Geopolitical instability of increasing scope, including at least cultural and resource wars, are in the offing before anything gets settled. Remember the ‘100 years war’?

Indeed, debased currencies and the evaporation of sound money are related to economic and social turmoil. Bankrupt regimes and empires have long attempted to solve the imbalance between their stupendous spending and declining tax revenues by reducing the silver or gold content of their coinage--in other words, "inflating their way to prosperity."

It never worked. Bad money drove out good money, meaning people hoarded gold, silver and sound money and quickly passed off the depreciating "bad" money onto some other sucker.

But the ease of extending this trend in the dollar troubles me. Things rarely turn out as the 97% consensus expects. (By some measures, "dollar Bulls" have been reduced to a near-statistical-noise 3%.)

So let's ask cui bono: who benefits from the collapse of the dollar, and who would benefit from its appreciation?

In general, those with debts to pay would benefit, as debt can be paid with "cheaper" (depreciated) dollars. Those holding the debt would not benefit, as their payments would continue to decline in purchasing power.

So the question boils down to this: who holds the debt and assets? Put another way: who would benefit from the dollar actually rising in value? The answer: the rentier-financial Elites. They're the ones collecting rent and interest payments, and a depreciating dollar is not in their interests at all. The falling dollar benefits those paying down debt (debt-serfs), not those to whom they pay rent and interest.

That the top 1% own 2/3 of the productive assets of the U.S. is simply fact, as is the rising level of income inequality. Please consider this chart:

Note that the last extreme of inequality was reached just before the Great Crash of 1929. The dynamic is this: as the rentier-financial Elite (what I call the Plutocracy) over-reaches , then their share of thenational income rises to extremes. Their over-reach creates tremendous imbalances in the financial system, however, which lead to financial crisis.

At that point, the State (central government) places some modest restrictions on the Plutocracy's ability to over-reach (overleverage, fraud, embezzlement, etc.), and income inequality falls.

That the vast majority of the national wealth and income is held by the top 1% of households has been documented in a number of books:

The Rich and the Super-Rich, A Study in the Power of Money Today
(out of print, but used copies are available)
Ferdinand Lundberg

Wealth and Democracy: A Political History of the American Rich
Kevin Phillips

The Power Elite
C. Wright Mills

Who Rules America? Challenges to Corporate and Class Dominance
G. William Domhoff

Strangely enough, the mass media presents the Federal Reserve and the Treasury as "in charge" of the dollar's decline. Those agencies certainly control the strings of money supply and liquidity, but who sets their agenda? The bureaucrats? No, the bureaucrats (Bernanke et al.) are hired hands, following an agenda set by others-- those who control concentrations of wealth and thus political power.

From this perspective, the entire outrageous bailout of the financial sector makes perfect sense. Question: who held most of the stock, bonds and other financial assets which would have been rendered worthless had the sector been allowed to collapse? It wasn't Joe Homeowner; some 80% of the financial assets of the nation are owned by the top few percent of households.

So naturally the agenda sent down to the Congress and bureaucrats was simple: backstop the horrendous private losses with government (taxpayer) funds. The profits were private but the losses must be socialized/passed to the taxpayers. And so it was done, even as the citizenry pounded their "representatives" with emails running 300-to-1 against the gigantic bailout of the stupendously wealthy.

In The Royal Scam, Anonymous Correspondent suggested the rentier-power Elite could shift their assets out of the dollar and then swoop back in after the devaluation to scoop up the assets of the U.S. for a pittance.

That is a scenario worth pondering, to be sure, as it would solve the Federal Government's massive debt at the same time.

But just as a thought experiment, consider the alternative: that the power Elite sets the agenda of a rising dollar. Since the power Elite owns a staggeringly large amount of assets held in dollars, a rise in the dollar would increase their purchasing power as rents and interest are paid in dollars. A decline in the dollar would not serve their interests.

So if a rentier-financial Elite does hold political influence, why have they allowed the dollar to plummet? Perhap their assets and income were growing faster than the dollar was declining. Now that their assets and income are no longer growing faster than the dollar is declining, the agenda is about to change: strengthen the dollar.

Lastly, we might ask who else internationally might benefit from a rising dollar. How about the Chinese, Japanese and oil exporters who hold dollar-denominated debt?

We might also note that exporting nations desperately want a stronger dollar which then weakens their own currencies, making their goods more competitive in the U.S. market.

If we line up all those who benefit from a rising dollar, we find some reason to anticipate a reversal in the dollar's decline.

Here is a chart of the dollar:

Comments

[JudeJin:]

the elite owns the real businesses through stocks and the real estate and a lot of gold and hard assets.

actually they'll benefit most if dollar collapses because the nation's debt will be wiped out and the elite can reboot to a fresh new session of ponzi scheme

Sep 25 08:11 AM

[Bob 123:]

The so-called power-elites the author refers to are not so much in danger of a declining dollar. They still own the income producing properties that will generate income in dollar-inflated terms. Regarding their accumulated wealth, they have the wherewithal to shield it via moving into other currencies or commodities and will do so in plenty of time before the ultimate collapse, as they are doing now.
Will the Chinese or others who hold massive amounts of debt let us inflate away the value of that debt? I hardly think so. We have to do what our banker says, as they could collapse our economy in an instant if they started to massively unload treasuries.
So the contrarian view may be correct -- the dollar may just rise after all. What a devastating surprise that would be to the stampeding herd who piled into the anti-dollar trade.

Sep 25 09:24 AM

[Slvrizgold:]

The dollar will NOT increase in purchasing power - EVER. We have COMPETITIVE currency devaluation now. ALL currencies are inflating and losing purchasing power. This fact explains why the USDX is not already much much lower than it is now.

The costs of the goods and services you need is a better indicator of what a US dollar is worth than the USDX imo. USDX is just a measure against other poop encrusted toliet paper.

Sep 25 10:09 AM

[Econ 101:]

I beg to differ. Those leftists in DC talk bad about capitalism, but they envy the money and power. They lust after what the "eeevil rich" have. It isnt that they hate big money, they want to be big money and "eeevil rich", they hate that they arent big money. However, I think they are more like Joe Stalin than Pollyanna when it comes to rearanging the structure.

The income tax was the single biggest reason for the reduction in creation of new millionaires until the 1990s. The rich seek to reduce competition by having the government prevent capital formation by new individuals. Leftists seek to tear everyone down so they can control the means of production and allocate it for their own benefit. If you look at what happened in the USSR there were shortages for the common people but the party members, and especially the elite of the party, had everything they needed.

I think the authors analysis has creedance if only because when "everyone knows some thing, it is usually wrong"


On Sep 25 07:22 AM Steve in Greensboro wrote:

> You argue that the "power elite" (the eeevil rich) set the agenda
> of a rising dollar.
>
> The problem is the real "power elites" are the permanent ruling class in Washington D.C. composed of the Leftists who run the government (elected and career bureaucrats) and their fellow travelers in the media.
>
> The real power elite is fundamentally opposed to capital accumulation by the eeevil rich and are willing, even enthusiastic supporters of ongoing and permanent currency debasement to bail out a bankrupt Federal government (with massive unfunded liabilities like Social Security and Medicare) and to bail out their voter base, individual debtors who are also massively overleveraged.
>
> Of course the 95% debasement of the USD from the beginning of the 20th century through today is prima facie evidence that the strong dollar is absolutely not on the agenda of those in power.

Sep 25 11:12 AM

[JeffDB:]

I disagree with the analysis for a couple of reasons.

1. I don't buy the contention that "rentiers" and other asset holders necessarily benefit via a stronger dollar. Their assets have inherent value regardless of whatever currency is used as a benchmark and whatever value is placed on that currency.

If the dollar is devalued, or in other words there is inflation, they raise the rents and the notional value of their real estate rises. That's basically what has been happening for many decades now. That is one reason hard assets are considered an inflation hedge. Just because the currency devalues doesn't mean the underlying assets devalue. See gold. It's priced in dollars (often) but it isn't devalued every time the dollar drops.

Inflation does cause dislocations in an economy and it becomes less efficient, so to that extent it harms asset holders so to that extent your "power elites" might prefer to do without inflation, but that segues into my second disagreement:

2. At some point neither the "power elites" nor the characters pulling the strings at the Fed will have any control over whether we have devaluation/inflation. I think Chris Martenson's "Crash Course" www.chrismartenson.com... gives a nice presentation on some of the issues involved here, but the bottom line is that it can become a mathematical impossibility to get out from a debt load that exceeds the debtor's ability to repay without massive inflation.

For instance, A country will likely either default or go into a serious inflationary spiral some time before they get to the point that the interest on their debt exceeds their tax revenues.

We've been monetizing our debt on a grand scale over the last year or so and once the economy begins to recover and the velocity of that money begins to return to more normal levels we'll either begin to feel the effects of rising inflation or they'll have to drain the economy of some of that money. If/when they do, however, it will have deleterious effects on the economy in its own right. It will cause interest rates to go up, which would have quite a few adverse effects, including slowing down the economy and hurting debtors, the largest of which in the history of the world is the U.S. government. It would also likely cause a new round of defaults on loans, dropping tax revenues, raising interest rates on our debt, hammering the value of the trillions of already toxic mortgages on the U.S. balance sheet, etc.

In other words we are between a rock and a hard place. They can't just wave a magic wand and increase or decrease the value of the dollar without significant ramifications elsewhere.

Sep 25 11:59 AM

[yellowhoard:]

Right on Jeff.

Imagine the bankruptcies that we'll see in CRE when shopping malls and office buildings are refinanced at 10% or more?

Sep 25 12:43 PM

[Mono:]

jeff i also appreciate the comment. i don't even think you need to relate any of this to physical assets like real estate.

a soft dollar is great for debtors, or so the author thinks. not true in my opinion. if your debt is paid easier you will find your way out of debt but you will quickly realize that the monetary policy has changed. to ever get any credit after that, you will not find any. with soft dollars lenders will ask for interests no one can float- softest dollar or not. in the end the currency that helps you in the immediate kills you in the end.


On Sep 25 11:59 AM JeffDB wrote:

> I disagree with the analysis for a couple of reasons.
>
> 1. I don't buy the contention that "rentiers" and other asset holders
> necessarily benefit via a stronger dollar. Their assets have inherent
> value regardless of whatever currency is used as a benchmark and
> whatever value is placed on that currency.
>
> If the dollar is devalued, or in other words there is inflation,
> they raise the rents and the notional value of their real estate
> rises. That's basically what has been happening for many decades
> now. That is one reason hard assets are considered an inflation
> hedge. Just because the currency devalues doesn't mean the underlying
> assets devalue. See gold. It's priced in dollars (often) but it
> isn't devalued every time the dollar drops.
>
> Inflation does cause dislocations in an economy and it becomes less
> efficient, so to that extent it harms asset holders so to that extent
> your "power elites" might prefer to do without inflation, but that
> segues into my second disagreement:
>
> 2. At some point neither the "power elites" nor the characters pulling
> the strings at the Fed will have any control over whether we have
> devaluation/inflation. I think Chris Martenson's "Crash Course"
> www.chrismartenson.com... gives a nice presentation
> on some of the issues involved here, but the bottom line is that
> it can become a mathematical impossibility to get out from a debt
> load that exceeds the debtor's ability to repay without massive inflation.
>
>
> For instance, A country will likely either default or go into a serious
> inflationary spiral some time before they get to the point that the
> interest on their debt exceeds their tax revenues.
>
> We've been monetizing our debt on a grand scale over the last year
> or so and once the economy begins to recover and the velocity of
> that money begins to return to more normal levels we'll either begin
> to feel the effects of rising inflation or they'll have to drain
> the economy of some of that money. If/when they do, however, it
> will have deleterious effects on the economy in its own right. It
> will cause interest rates to go up, which would have quite a few
> adverse effects, including slowing down the economy and hurting debtors,
> the largest of which in the history of the world is the U.S. government.
> It would also likely cause a new round of defaults on loans, dropping
> tax revenues, raising interest rates on our debt, hammering the value
> of the trillions of already toxic mortgages on the U.S. balance sheet,
> etc.
>
> In other words we are between a rock and a hard place. They can't
> just wave a magic wand and increase or decrease the value of the
> dollar without significant ramifications elsewhere.

Sep 25 01:45 PM

[JeffDB:]

On Sep 25 01:45 PM Mono wrote:

> jeff i also appreciate the comment. i don't even think you need to
> relate any of this to physical assets like real estate.
>
> a soft dollar is great for debtors, or so the author thinks. not
> true in my opinion. if your debt is paid easier you will find your
> way out of debt but you will quickly realize that the monetary policy
> has changed. to ever get any credit after that, you will not find
> any. with soft dollars lenders will ask for interests no one can
> float- softest dollar or not. in the end the currency that helps
> you in the immediate kills you in the end.

---

That's certainly true. I assumed a loan on my first home at 11.5% interest which was considered a bargain then as the going rate was 13% .

Imagine what interest rates one could expect on credit cards in that type of environment.

But credit might become nearly non-existent if inflation rates shoot up into the double digits. Who would want to loan any money even at high rates if there is no stability in the value of the currency you are expecting to be paid back in.

I had a cousin who lived in Brasil. Her husband said that when they were going through some strong inflation everyone would rush home when they got paid to convert their paychecks to gold or dollars to put in a safe to keep the value from being eaten away by inflation.

I've read stories of how ridiculous things have gotten in some other countries with high to hyper inflation rates. One related how people would get paid, grab a car or taxi and go immediately to the grocery store to spend it as fast as possible. That paycheck was losing value during the taxi ride. The stores didn't post prices because they could change between the time you picked it up off the shelf to the time you got to the checkout line.

That obviously throws labor negotiations into complete chaos. Strikes are a constant part of daily life. There is no stability in such a society and the economy is in a shambles.

Sep 25 02:08 PM

[JeffDB:]

On Sep 25 12:43 PM yellowhoard wrote:

> Right on Jeff.
>
> Imagine the bankruptcies that we'll see in CRE when shopping malls
> and office buildings are refinanced at 10% or more?
---

Not to mention to what will happen to the deficit as our interest expenses shoot up. We started skewing our Treasuries to shorter terms during the Clinton years to help lower our interest expenses, but that makes us more vulnerable to rising interest rates as it is rolling over more quickly now. The Chinese have apparently begun moving their purchases to shorter maturities to allow them an easier exit as well.

All that on top of the fact that the Social Security "Trust Fund" is about to transition from a net purchaser of Treasuries to being a drain on the budget as the baby boomers begin to retire.

Interest rates would have to jump quite high to attract enough investors willing to buy in excess of a trillion dollars in Treasuries each year. If there aren't enough purchasers and the Fed continues to print money to buy them themselves the resulting inflation will scare off even more potential investors. Even a 9% interest rate loses them money in a double digit inflationary environment. If they start to abandon ship the Fed has to print even more money to make up the difference putting us into an accelerating inflationary spiral. Unless we want to raise taxes in a major way ...

Sep 25 02:21 PM

[Jimbo:]

Jim Rogers has predicted a currency crisis and I fear he may be correct. I keep reading the FED is making the Treasury auctions look like a success by making deals with foreign entities to buy their U.S. Agency debt and pay in Treasury securities. I am not sure I understand all these deals but what happens when option ARMs reset next year, if the unemployment rate does not improve(or gets worse),and we are unable to fund the continuing and increasing federal debt?

Sep 25 02:54 PM

[carey_jim:]

The "rich" (the wanna be rich) benefit from inflation when they speculate on anything using margin. Inflation causes all prices to go up: real estate, stocks, etc.

However, the super rich (the 1% who "own" America) don't speculate as a rule. They are conservative and are content to keep what they have and make a small return on their (huge) principle. So when the value of real estate, for example doubles due to inflation, they raise their rents appropriately so that their profits and net worth remain the same. For the same reason, deflation doesn't hurt them either.

Deflation hurts the wanna be rich because they are the people who are willing to gamble to GET rich. Deflation makes the process much more difficult.

The math is simple:

For ease of calculation, assume a million dollar piece of real estate that doubles in value in one year and assume all other prices double as well.

$50,000 down payment on a million dollar piece of real estate controls two million dollars the next year and on the sale realizes a million dollar profit.

Since one million dollars is only worth a half million dollars at the time of the sale, the real profit on a 50,000 dollar investment is only a half million dollars which is only ten times the value of the $50,000 investment (not twenty.)

This process doesn't exist during deflation. Banks don't like to loan money for property that is losing value and investors don't want to borrow money to buy things that are losing value either.

But, as I've said many times in my posts on SeekingAlpha, economic models are only road maps and we if mistake the map for the city, we might as well stay home and read the map instead of going on vacation. But vacationing in a city without bringing a map is also stupid.

One thing is certain: Keep your eye on your wallet when you are traveling.

Sep 25 03:09 PM

[carey_jim:]

In case anyone missed this article on the benefits of deflation:

www.bloomberg.com/apps...

Sep 25 03:18 PM

[JeffDB:]

On Sep 25 02:54 PM Jimbo wrote:

> I keep reading the FED is making the Treasury auctions look like a success by making deals with foreign entities to buy their U.S. Agency debt and pay in Treasury securities. I am not sure I understand all these deals ... >

Chris Martenson has a post on this topic that may give some insight:

www.simmonsco-intl.com...

Sep 25 03:28 PM

[User 357705:]

Still haven't had your meds adjusted?


On Sep 25 07:22 AM Steve in Greensboro wrote:

> You argue that the "power elite" (the eeevil rich) set the agenda
> of a rising dollar.
>
> The problem is the real "power elites" are the permanent ruling class
> in Washington D.C. composed of the Leftists who run the government
> (elected and career bureaucrats) and their fellow travelers in the
> media.
>
> The real power elite is fundamentally opposed to capital accumulation
> by the eeevil rich and are willing, even enthusiastic supporters
> of ongoing and permanent currency debasement to bail out a bankrupt
> Federal government (with massive unfunded liabilities like Social
> Security and Medicare) and to bail out their voter base, individual
> debtors who are also massively overleveraged.
>
> Of course the 95% debasement of the USD from the beginning of the
> 20th century through today is prima facie evidence that the strong
> dollar is absolutely not on the agenda of those in power.

Sep 25 03:30 PM

[JeffDB:]

Interesting article, carey_jim, thanks for posting it.

On Sep 25 03:18 PM carey_jim wrote:

> In case anyone missed this article on the benefits of deflation:
>
> www.bloomberg.com/apps...;sid=a_IZywsbozWg

Sep 25 03:32 PM

[JeffDB:]

Oops, I gave the wrong link in the original reply. The corrected one is at the end of this post.

On Sep 25 02:54 PM Jimbo wrote:

> I keep reading the FED is making the Treasury auctions look like a success by making deals with foreign entities to buy their U.S. Agency debt and pay in Treasury securities. I am not sure I understand all these deals ... >

Chris Martenson has a post on this topic that may give some insight:

On Sep 25 02:54 PM Jimbo wrote:

> I keep reading the FED is making the Treasury auctions look like a success by making deals with foreign entities to buy their U.S. Agency debt and pay in Treasury securities. I am not sure I understand all these deals ... >

Chris Martenson has a post on this topic that may give some insight:

seekingalpha.com/artic...

Sep 25 03:42 PM

[cui_bono:]

does not matter that the dollar falls for the elites/ultra-rich when they retain ownership of all the most important and fundamental means of production of life necessities, all major and important real-estate, and already sit on the main bulk of the worlds gold supplies. they can let the dollar have any price it needs to bankrupt enemies or deplete the public's money and purchasing power so they cannot afford to own their own houses or avoid loans. serfdom is having to pay half your salary for housing, rent. one third in interest on loans on your car, furniture, kitchen, or anything you need. This means all your life you will work cheap, for little, produce much, make your boss profits, the surplus and value of your labour is profited on by sale or the added value sold to foreign or other interests. The main question is who directs labour and for what ends? today all production goes to military production, while societys efforts _could_ have been spent housing everyone for free, which would have liberated millions of dollars to let people do other things. giving people free energy, would let people get even more money, almost not having to work ;) the point being that the currency's ups or downs is irrelevant to the ruling elite. Control and ownership of the direction and the means of the system is the importance. I know it sounds like Marx, but there you go. If all money is devalued or worthless, owning all the farm and all the food would make people give me all their assets and everything of value to buy my foodstuffs. Basic knowledge even indepthly and adeptly illustrated by the Disney artist Carl Barks, in a Donald Duck & Uncle Scrooge McDuck story in the 1950's or 60's :-)

Sep 25 06:01 PM

[HA65MPH:]

JEFF AND ALL WHO POSTED ,...WOW..Great insights from you all..Thanks to you I Learn a lot...KEEPING ''REAL'' IN HAND Gold and SILVER ..GLTA !

Sep 25 11:00 PM

[cui_bono:]

Government (the general public) is robbed through the devaluation of their dollars, the fleecing of their assets (natural resources given to private corporations) and the economy is rigged to row the economy from boom to bust, robbing the masses, enriching the few who are on the inside of the Gold-Fiat currency game. where is the Law of Nature that says we should pay for our living quarters with our life's blood: our work? If my father robbed your father of his lands, should you pay me for your right to live on that land (house) simply because I inherited real-estate illegaly aquired? remove the generations a bit and everyone can see that land and wealth was robbed by a few some hundred or more years ago. In europe the criminal families robbed the rest of their lands centuries ago and we still pay the inheritors with our blood and sweat. Government should provide housing for free, since we are not serfs or slaves and we belong to the earth and all the earth belongs to EQALLY much to each and every one, whomever is living on it right now.

Sep 26 05:46 AM

[Asitoughtobe:]

Steve,

The power elites in Washington DC have been Leftists for the past 80 years. How pathetic a response right in line with those that want the masses to be blinded to the truth. Nothing you stated dismisses the truths within "The dollar may not be doomed" article written by Charles.

Trust me there is and will continue to be a movement in the world to find a replacement for the dollar as the reserve currency of choice. And I'll likely see this happen within my lifetime.

Healthy trading!


On Sep 25 07:22 AM Steve in Greensboro wrote:

> You argue that the "power elite" (the eeevil rich) set the agenda
> of a rising dollar.
>
> The problem is the real "power elites" are the permanent ruling class
> in Washington D.C. composed of the Leftists who run the government
> (elected and career bureaucrats) and their fellow travelers in the
> media.
>
> The real power elite is fundamentally opposed to capital accumulation
> by the eeevil rich and are willing, even enthusiastic supporters
> of ongoing and permanent currency debasement to bail out a bankrupt
> Federal government (with massive unfunded liabilities like Social
> Security and Medicare) and to bail out their voter base, individual
> debtors who are also massively overleveraged.
>
> Of course the 95% debasement of the USD from the beginning of the
> 20th century through today is prima facie evidence that the strong
> dollar is absolutely not on the agenda of those in power.

Sep 27 08:02 PM