U.S. Dollar Paradigm Shift Underway

Today is a day to talk about paradigm shifts.

One theme of our times is the US dollar 'collapse' all facilitated by political mismanagement of our system, unsustainable trade deficits, bloated budget deficits, horrible energy policy, and most recently, a credit crisis causing a loss of faith in US assets.

You don't need to go far to find areas of the blogosphere and youtube where goldbugs congregrate and call to an end of time, soliciting everyone to buy their duct tape and prepare to deal with our transition to becoming the next Zimbabwe.

So amidst all of this, plenty of emotion is gathered. Who can deny that any threat to the sanctity of the dollar is upsetting and definitely a threat to national pride? Its easy to understand how disappointing this situation can be for us Americans, who for the better part of our lives have lived under the notion of a nationalistic and even moral superiority. What a dilemma that puts us in this past few years, having to gather some humility having 'failed' on multiple levels?

So now everything is finally catching up with us. We are paying the price for fiscal mismanagement, years of bloating money supply without fear of repercussion, and as Ron Paul would say (I'll paraphrase his concept) a "flawed and unnecessary central bank driven system based on broken fractional reserve banking policy backed by no credibility (gold)."

That is at least what everyone you talk to would believe. The public notion is one of trend following. At the peak of any bubble, the public has resounding confidence in whatever the bubble is. During the tech bubble, Dow was going to 40k. During the housing bubble, you better buy now, or you'll be unable to afford anything ever again. The commodities bubble? The Long any currency but US dollar bubble? Well we're still dealing with that. But the gold and silver bubble of the early 80's has a familiar ending.

Ron Paul's folks are merely blind trend followers who do not realize innovation that defines America is by the large part fueled by a deflation-avoidance driven policy that serves to provide incentive to invest. The gold standard was a resounding failure as the US was trapped in a deflationary mire for decades on end, holding back economic and technological innovation unnecessarily.

The herd is never good at realizing the risk rises (at least in the long term) as we get further and further from the mean, because they assume every trend reflects a permanent paradigm shift. The reality is contrary - paradigm shifts are the exception; cycles are the commonality.

The resounding truth and best opportunity is always somewhere everyone is not looking. And that is this: The US Dollar is still a fundamentally sound currency, despite like any developed nations we face very real challenges in our entitlement systems(Medicare sustainability), energy policy, and war spending policy.

But all of those problems are fixable. One needn't look far to realize that speculative flows to the euro are not quite justifiable on news reel of German bank stability. It also doesn't take a rocket scientist to realize Japanese dependence on the American economy, nor its dependence on a weak Yen to buoy strength, thus justification for higher interest rates and more favorable currency fundamentals. Our debt to GDP ratios are still amongst best in the developed world, and a few mere changes of government policy with respect to entitlement sustainability, tax policy, energy and food subsidization, and redirection of war spending to local infrastructure improvement can easily usher an era of US broad economic leadership.

As far as money supply: we are in a deflationary time, not inflationary, as the goldbugs would have you believe. Money supply is coming down as the financial world is reassessing its risk models. Less money is moving around; credit is reigned in. In a market where fiscally sound municipal debt is chaotically unwound, you realize we are having a market dynamic driven detachment from risk related to the actual holdings determine new values of assets. The FOMC is merely swapping paper not able to be properly valued with treasuries to prevent a cascading liquidation effect. This is a stabilizer, not a monetary flood!

Aggregrate demand is falling. That is the short term trend until bottom is found. And yet, commodities have generally reigned (Did you know crude oil is the new 30 year bond?). While world equity markets have mostly become sharply negative bears, somewhat predicting global recession, the commodity bulls argue a contrary and nonsensical notion, of stagflation, where commodity demand is miraculously maintained. Baltic shipping indexes sharply disagree; rates on the movement of goods are coming down. While there are genuine issues in supply, especially concerning misguided food/energy policy, they are all repairable in a very real and attainable way.

As I've previously detailed, our structural price problems could largely be remedied by investment instead of consumption spending. By investing, and merely going to all electric/battery vehicles, we could stop oil importation. Just imagine the cascading benefits on the broad economy of a lesser 'energy tax' (higher productivity), lesser dollar exportation to petro producers, and a disappearing need to use food for fuel. The whole equation changes. Suddenly oil is no longer worth its weight in gold, the dollar is, and hundreds of billions of dollars are no longer necessary to be 'invested' in stabilizing the mid-east.

So my point? The world will (likely already) obviously experience a global cyclical recession of some extent and decoupling will prove to be a fantastical myth, thus undermining commodity bulls' claim as their sole justification for continued high prices. Financial memories are short, and never let the equity markets get far ahead of themselves following the 2000 bubble pop. With that said, the beef of substantial risk (as an investor, not a short term trader) is entirely in holding long commodities and USD short positions. Deflation is the name of the game, and reversion to the mean based on fundamentals, not momentum, is where the value lies.

The years of 2008-2009 will likely mark a multi-decade bottom in dollar weakness, as a new political and financial landscape with a fundamentally sound direction will take hold. The fundamentals in so many trade partners have detached from their currency valuations, and this provides opportunity. New financial memory will prevent further debacles of excess, and hopefully crude will stay high long enough to stimulate a new era of energy efficiency, leading to the next great bull. Call me the optimist, even a contrarian, but selling the US short is a foolish thing to do after the proverbial toilet has already been flushed.

Disclosure: None

Comments

[cheapybob]

Boy, are YOU full of crap!!!

The US dollar is worth WHAT compared to what its supposed to be worth? Go look at your constitution. Its been debased till its almost worthless. In the early 1900's a loaf of bread was 1 CENT. Look at it now.

[Moses]

I think you missed the point their Bob, he is saying don't be long in commodities while their already at the top and don't short the US dollar when it is already at the bottom.

[Travis]

This article is great. Finally we get an author that values a long term outlook with a logical and rational understanding of the TRUE VALUE OF THE AMERICAN DOLLAR AND ECONOMY! We are still the number one consumer in the world with the largest GDP... the world needs us to buy their exported goods just as much as we need them to fund our debt -if not more.

"So at risk of sounding Pollyannish, it is encouraging to note that big central banks in Asia and Europe are not bailing on the U.S. economy. According to a report released by the Department of the Treasury on Monday, foreign central banks bought a net $36.1 billion in Treasury bonds and notes in January. That was a record." from - money.cnn.com/2008/03/...

While foreign governments may be investing in euros and other currencies, they are still buying dollars, because they know they are backed by the U.S.

And the world should be (and will be) applauding Bernanke and the Fed for the innovative and aggressive ways they have employed to get our economy and credit markets working again.

Anything in the economy is cyclical, just like the dollar. Our current recessionary forces will start to bring price inflation back down. As with the "irrational exuberance" of a bubble market, we see the same doomsdayers come out during tough times.

cheapybob: What is the US dollar supposed to be worth? And are you seriously comparing a loaf of bread at 1 cent in 1900 to current prices? Of course we are going to have inflation, but we have also seen an explosion in GDP, productivity, and wealth (in real terms) since 1900. Come on now.

[cachaca]

I realize that we all have our own, but I do not agree with your point of view.

"
As far as money supply: we are in a deflationary time, not inflationary, as the goldbugs would have you believe. Money supply is coming down as the financial world is reassessing its risk models.
"

Money supply coming down!!! Ask the guys working for the Mint Presses. Ask the oil sheiks what they are doing with all the greenbacks they get from Oil. Look around for how much real estate has already been bought by foreign interests, and continues to be bought every day. Foreign banks helping American banks (a-la Citibank) is not for charity, but a great way to unload greenbacks.

I too believed that the money supply was tight, but it is not true. Anybody (who can afford) can find a bank that will loan them money, and at a low interest rate.

**
I think that we are at the end of an era...an era of economic domination by the USA.
I believe that within the next 12 months we will see OPEC switching to the Euro (following Iran's lead, who switched to the Euro in 2006).
I believe that China will slow down its growth to single digits over the next 5 years, and then to sub 5%. They just can't sustain this momentum.
I believe that Gold at $1000/oz is new new base, along with Silver at $20.
I believe that the new baselines in the price of most commodities are not mostly due to speculation, but due to actual market forces.
I believe that OIL is being heavily speculated by OPEC and the new high prices are being used as a baseline for non-OPEC oil producing countries (a-la Brazil).

All in all, your opinion, or mine, are going to be proven over the next few months.

Unlike you, I do not think that the toilet has been flushed. There is a lot of DUDU yet to drop...and just like my 4 year old did...the toilet paper is going to get pulled by the toilet when it does flush. There goes the value of your dollar.

[MLG]

Agree, it is within our control to improve our fiscal and trade imbalances and to invest in energy independence - but are we going to find the will to do it?... It strikes me that the lion's share of the challanges we're facing today in this country are home-made... Sad but fixable.

Yes, the US dollar and US assets are undervalued. Real estate prices in many established US cities are nowadays similar to the prices being paid for similar square footage in developing European cities where average salaries are 1,000 Euro per month and people still use 5 decade-old communist infrastructure. I find it hard to believe that Europe with their unfavorable demographics, sky-high taxes, and culture of red tape and entitlement has suddenly become the world's model of economic growth and its currency of choice.... Don't think it will last...but again it's up to us...

[User 86945]

Here is what Mr. Krause wrote on his blog said back on Friday, October 26, 2007

"Is the market misreading the FOMC?

I am in total disbelief that the talking heads, hedge funds, and powers that be are betting so much on the fed cutting here (even 25bp) despite their past move being 50bp. The FOMC executed their last cut after a dismal jobs report, and during commercial paper crisis which resulted in a flight to 90 day bills not seen since the crash of 87!

What's different now? We aren't in credit crisis anymore. The commercial paper market, despite not being what it once was, stabilized somewhat. The unknowns of subprime asset writedowns are much more known than before (despite being worth 18 cents on the dollar versus 38-42 cents at mid august)."

Yeah, back in Oct 07, the USA was no longer in a credit crisis! Wow. Does this guy have any credibility left after that memorable statement?

[Travis]

I dont think there were many people (besides the doomsayers who think the world will come to an end) that saw the credit markets unravelling as much as they did.

Just because someone is wrong once, doesnt mean they can't be "right" or make a good observation/prediction later.

[User 167494]

Michael.. . I sure hope you're right that we're at the bottom of the falling dollar trend. But.. I'm afraid you're dead wrong. As the dollar continues to slide (and it will some before things improve) other countries in the world with less debt and more manufacturing base will recover far faster than the US. The US will recover, but not in the prime that it once was. We're witnessing the end of an empire.

[triznix]

The dollar has been money for only 200 some years. gold and silver have been money for thousands of years. No fiat currency ever survives. If you look at the history of coinage of the roman empire, you can trace the metal content and see that the actual amount of precious metal content decreased as the empire collapsed. But if you only want to look at the past 30 to 40 years, then that is your choice..... heh

[Travis]

You cannot compare our global world and economy with the roman empire.... get real.

[cheesecake]

my long term outlook is positive also. dollar is near it's low and commodities their high. but their strengthening/decline will be slow, probably 3-5 years for 20% price movements.

[triznix]

I was comparing it the united states, genius, thus the line about, "The dollar has been money for only 200 some years"

[Jason Mark]

I believe that the US will be the recepient of large investments from trade partners especially the middle east. Dubai is the most recent example but will not be the last. They recognize that their oil is running out and that future economic growth and prosperity will demend on diversifying into industries like tourism and finance, which it is already doing. Dubai regards the US as its most important market. US petro dollars will come back to invest in our economy which will hopefully be used to develop and market the energy solutions for the world for the future. The US is largely responsible for the growth in many countries becuase of our companies investing in those markets. The next trend should come back to the US.

[iThinkBig]

Been preaching this for three weeks now to every VC and big politician I am connected to. The idea will work. Every great American boom was due to innovation used domestically at first then globally. I don't care about credit due, I care about implementing the innovative energy solution post-haste, getting through the pain and having a great future for kids, grandkids and yes, even myself.

[Travis]

There isn't enough gold and silver on the planet to support our global financial system. We need fiat money period. It greatly helps our financial system to be working in one currency (dollars for now), by letting the dollar eventually crumble, the whole world would be in a depression - no one wants this, so they will work together to keep the system working.

[01GTvert]

My god...only one decent post in this long list of BS. CheapyBob nailed it...it's simple supply and demand. More $s are being printed meaming less goods can be purchased with them. The credit crises coupled with depreciating home values has destroyed confidence in the US system which is only going to continue. For those of you that say innovation has created economic "booms"...I guess there is a sucker born every day. Booms are created by the FED. The over issuance of credit creates a boom and the tightening creats a bust...just like in 1929. It's all planned and orchestrated. But by all means...please go on thinking the way you do so I can continue to get rich of mining stocks :)

[Michael B. Krause]

This is a great provoker ... I was wrong about the depth of the credit crisis. I'll admit that. But if you read further in the same article, I go on to say:

If $90+ oil is here to stay, we're only at the beginning of the food commodities rally. Watch corn go to $6.00/bu, soy to $13.00, and forced out wheat acres will repeat this past season's ascent to an even more ridiculous level. Then comes the more expensive to feed pigs, cattle, and resulting milk.


And to the first writer: The average middle class lives more comfortably (minus the servants) than Rockefeller did at the turn of the century. A move away from gold standard facilitated this.

To the last poster, you say:

" For those of you that say innovation has created economic "booms"...I guess there is a sucker born every day. Booms are created by the FED. "

You are getting it backwards. The flexibility of the money supply helps and does not hinder gigantic productivity and technological increases. It is the fuel to our innovative spirit in the US. Sure it leads to excesses and busts like this, but this cycle is necessary. Greed, fear and risk taking are inherent in capitalist mentality systems; a move to a system that removes the cyclical element takes away the capitalist 'oxygen' so to speak.

On the other hand, I'm in no way condoning the giant 'herd' screwup that subprime became (not just in the US scene, but the world scene). It is a story of collusion between i-bankers, ratings agencies, and blind faith into flawed statistical models. Perhaps the lesson here is everyone in finance should be required to take 4 semesters of statistics and econometrics to not function like the herd and think for themselves.

[iThinkBig]

Two points 01GTvert: Your correct about supply and demand/1929 all over again and 'innovative' financial credit vehicles like derivatives.

But don't tell me innovation like the railroad, radio, cars, planes, computers, the internet and soon to be energy had no place in economic boom times increasing efficiency and producing large profits. All these innovations tend to become overvalued by Wall St. as supply floods the market and the true worth of the product becomes worth less. The valuation games by Wall St. and investment banks help prop up the true value of innovation for a little longer then free market economics should and this is when those in the know dump assets and make massive fortunes while preaching the good times will go on forever. In 1929 radio was the tech innovation being ballooned to the moon. This time, it was money itself and real estate. 2000 it was the Internet.

Guys I knew were cashing out of mortage and financial companies in June while Greenspan and GS types were saying home values would only correct a little and our financial system was sound, 25% chance of recession, LOL! That lends to your point of planned and orchestrated, the tail end of an innovation boom cycle.

Build what the global customer demands (where supply is short) to continue to grow and that is energy. We have two problems. One is deflation because the global market is flooded with dollars and the value is quickly eroding with excess supply (but now that is drying up fast so watch the dollar begin to appreciate nicley in about a a year or two when they stop the printing presses soon).

The other is exorbident energy prices killing main street because their really is no competing market for petroleum (yet). There is also no save havens in normally stable investments such as real estate, so investors flocking to gold and oil. Both which will retain their value because both are in demand for the foreseeable future. However, if energy is de-regulated so we can drill domestically and build nuke plants, combined with Treasury subsidizes in biodeisel, coal liquification, rail & solar we will not only save Main Street we will become an exporter and create enormous wealth on Wall St. Stocks stink right now. M/A is not creating real, sustainable wealth friend as nice as the market has been to all of us these past several years. How much overseas investing by big corporations are going to yield dividends when the energy supplying global growth is tight?

[triznix]

The reality is, there is a commodity base for the dollar: it's oil. Oil has real, intrinsic value, paper does not. Unfortunately, oil is a limited commodity that is used up. Also unfortunately, since oil is concentrated in the middle east, the united states is forced to exert military influence there merely to protect our financial system. People around the world (except for most americans, it seems) are starting to realize this, including our middle eastern "allies". Kuwait used to peg there currency to the dollar. They recently depegged and were able to get their inflation under control. Contrast that with saudi arabia who maintains a dollar peg. their inflation is through the roof. they are not too happy about that.

It's not rocket science.

[ari5000]

I think he's partially right. Won't be a collapse of the dollar -- won't be a revival either. This is the end of the empire -- exactly like the Roman Empire. Comparisons are very appropriate -- to an extent. There won't be Visigoths to deal a final death blow. Just the continued leaky balloon dollar fizzling to oblivion which can only be stopped by a massive change of lifestyle by Americans.

Our fate rests on the government reigning in spending and increasing taxes -- with $9 trillion in national debt -- there's no way they'll ever do that. They'll let the Chinese eat that paper and get paid back in cheap money.

No big exciting crash, no big recovery... just years of this fizzle with Fed interventions to poke the embers of a dying economy occasionally. It was fun while it lasted.

[cachaca]

so...I see many opinions represented here...and it is just GREAT. No matter what side of the fence you picked.

Time will tell who was right or wrong.

Though I am a firm believer that we are on a path to inflation (too many greenbacks flooding the market), I will agree with the poster who said that too many countries base their economies on the dollar to let it go to hell all of a sudden.

I think this is the end of an empire...but we are not going to just die at 7am on Sunday. We are going down like a patient with cancer. The hair loss is normal after chemo, and recovery IS possible...hey Lance Armstrong did it!

[Travis]

It won't be the end of us... if anything foreign developed countries will just hold positions in euros, pounds, dollars, and juans. You have to realize that the power of the US is strong, both financially in terms of REAL WEALTH (our physical assets are worth a lot, including real estate, people want to immigrate here for our high quality of life this will always make our real estate valuable), our power as the world's consumer, and our military strength. The rest of the world is STILL buying our treasuries because they know more than ANY other country in the world, the US is good for it.

If our dollar loses more value, it obviously helps exports which spurs a segment of our economy that much needs it. Plus it hurts foreign exporting countries who aren't able to sell to us because we can't afford it. Eventually other central banks will want to increase their money supply to help ease the pain they are feeling from our devalued dollar. Think about the tourism in europe right now, even BMW is forced into layoffs because of hurting sales.

Plus, oil and gold are down... oil supplies are up, demand is down, simple economics will keep oil at a normal pace of price increase, not this rampant increase we have had in the past few months.

We live in a globalized economy more than EVER and we, nor the rest of the world, can afford to let any one country spiral out of control fiscally, financially, or economically.

We can survive this just fine, just like we have other cyclical and sudden (9/11) downturns.

[sedek]

"Call me the optimist, even a contrarian, but selling the US short is a foolish thing to do after the proverbial toilet has already been flushed."

The flushing is ongoing, the recent Deficit Stimulus Act, liquidity injections, BSC guarantees, and last week's rate cuts still washing over us, with more rate cuts, more bailouts, and congress tripping over themselves to come up with more ways to buy our votes with the grandkids' money.

Gold is useful as a standard, a way to recognize that the Dollar has lost 3/4's of its value in under eight years whil the Euro has only lost a half. Without the commodities, we would have no reference for the incompetence of our leaders and bankers.

[User 86945]

Since 2000, the S+P 500 is down significantly when you price the index in oil, gold, food, industrial metals. Most rates along the yield curve are negative even when you use the phony CPI from the government. Conservative investors and US dollar savers are getting crushed The standard of living - the amount of goods people are able to purchase with their income has been falling. There will be a reduction in the spread between the real incomes of the developed world and the emerging market world. Probably not in a straight line, but it will occur over time. Many developing countries used to be controlled by the same mentality of welfare for bankers, big industry, seniors, military- fill in the blank that currently grips the U.S. The staggering US debt- public and private will have to repaid in depreciating money. More so if the systemic banking bailouts continue. Paul is right about the lunacy of borrowing from world in order to protect it from it self. The taxpayer gets stuck paying the the tab plus the interest that comes with it. The politicians, their cliques and the two major parties make a fortune from handing out the contracts. You tell the truth on the big stage in the US and you are marginalized. Any benefit in the additional increase in the supply of money gets washed out because the amount of real goods one is able to buy shrinks. Money is only useful when it is exchanged for real goods. Trade the dollar on the long side in the short term, but in the long term, the dollar should go down and it will be bad for dollar earners and holders make no mistake about it.

[johngonole]

bravo "cachaca' I like the spirit of your post.

User 86945 - "Conservative investors and US dollar savers are getting crushed The standard of living." I liked your post too.

The above is right on. And Michael B. Krause you were wrong in your response that stated, "And to the first writer: The average middle class lives more comfortably (minus the servants) than Rockefeller did at the turn of the century. A move away from gold standard facilitated this."

So let me bring the two together. Of course the standard of living is higher now. I wouldn't be for a free market society if it didn't rise. The goldbugs, ron paul supporters, conservative investors, and most of the middle class who are getting crushed by inflation are upset because for the responsibile citizens the standard of living should be much much higher still. If one compares the standard of living to those in the 50's we are not so much better off with the exception of healthcare which has greatly improved (which we now want the govt to run). Both parents are working, kids are suffering cause of it, 1% of the population is in jail, the list could go on and on.

For most of us the oxygen that fuels capitolism is the simple idea that if I work hard my kids will enjoy a better standard of living then myself and I can benefit from the fruits of my labor. So you work hard to own what you buy, save for retiremnt, save for your kids college education,...etc.

Than the responsible class has their purchasing value is wiped out because the Fed prints more money and wipes them out. If one steps back and looks its like the middle class has become the slaves for the rich and poor classes. You are constantly forced to work because you cannot ever possibly save your way into a comfortable retirement because the dollar is purposefully eroded. And your finanical future is totally dependant on how well the Fed can initiate inflation and still balance out the up and downs and deflation and all that. Plus you MUST invest into shady institutions that are banks, brokers, mutual fund mangers, lobbiest all at the same time. Hey why not these financial conglermerates by accountants too.

Here is the point I really want to make to Michael krauss. If we had no forced inflation which of course is spent and controlled by the government and mostly irresponsible live for today debtors our currancy would be in a slow constant state of deflation. More productivity per person the cheaper the good or service the more valuable the currency. People would only have to sock away a little bit of money for retirement. And there would be no need for social security or medicare at least in terms of being used as a retirement vehicle. We may still want them as a oops I lived a really really long time insurance policy but nothing like now. Even if the currency was debased just a little bit (to counter population growth and help liquidity) and held purchasing power even people could easily save for their golden years and predict how long they would have to live before they would outlive thier money. That kind of prediction just isn't possible now

Instead we are on a treadmill where those who have recklously vaporized capitol, those who can't afford to pay their mortgage payment because they can never manage their moeny, people who make bad loans to get a better bonus to individuals and internet companies, those who want to maintain political power cause the rest of us responsible citizens to run faster and faster on the treadmill. Now one has to have some good luck, and make really wise decisions just to navigate this mine field. Why so many mines????

The term moral hazard comes to mind when I read Micheal's article. The idea that these huge ups and downs are just part of capitolism is short sited. The idea that we inflate our currency regardless of whether it is to fight off deflationary spirals or simply to avoid the next recession creates the opposite affect which I will term the moral decay spiral. These constant bail outs are providing incentive for irresponsible behaviors of every kind. More criminals, more irresponsbility, more debt, more of everything that caused the need for the printing of more money in the first place. This is the cancer that cachaca refers too.

Note that these Fed actions are needed more and more frequently. First 1987, than 1997 or was it 1998, than 2001 which really took a while, and now 2007. We had barely got ourselves out of the last downturn and here we are again for the same dang reasons. Speculators must lie in their mess if you ask me. My family should be force via FIAT currency to work for them.

And this is why a currency backed by a hard asset standard is better. We have given the Fascist control of our currency, allowed them the power of social engineering (see tax code and Federal reserve), taxaction of around 50%, etc...

All to trade small ups and downs for big ones.

So while I think primary article was though provoking I still thinks its just a slick way of saying let us run your lives cause we know better.

Also their are way more Ron Paul supporters than gold bugs. I think most of them are young fiscal conservatives. I think if he hadn't been dissed in the debates with irrelavent questions many fiscal conservative from the boomer generation might have also been brought on board

[johngonole]

"The FOMC is merely swapping paper not able to be properly valued with treasuries to prevent a cascading liquidation effect. This is a stabilizer, not a monetary flood!"

Well that is probably better than swapping government bonds for treasuries. Hey maybe the Fed will actually back the dollar with something.

[johngonole]

Printing more money is good because the fractional reserve banking system traded dollars for inflated assets is basically what I think your trying to say. So the money supply is tightening because the expansion that was done by the banks has failed. So lets back up that "FALSE" expansion with real money expansion.

I say FALSE expansion because your argument is that this is a deflationary cycle. I do think the Feds current printing of money is in response to deflationary fears of the housing bust.

So in the beginning you flood the market with a few new dollars forcing interest rates down, the banks expand that money by lending it out multiple times creating a boom that inflates prices due to the quick short money supply expansion. The boom goes bust because those prices were unstatainable because they were caused by short term pumping on the printing press and the creation of debt. Than we have a money supply contration due to the dollars the banks lent out not really being back by valuable assets. Deflation is coming so REPEAT cycle.

Now if the Fed can figure out how to constantly balance inflationary with deflation forces things might be OK...but you only have to be wrong once to create another cycle.

How about stop the presses that cause the cycles in the first place. Here is another way of looking at it. You don't really want to print a lot of money cause that would tick people off. So you print a little, than the banks do it for you with risky loans and fractional reserve banking, loose credit standards, etc... After all the banks can't fail so risk is not longer a deterant. On cue the banks get into trouble because they essentially trade a dollor for 75 cents so now you must print the money to save them.

Its like what came first the chicken or the egg. It doesn't really matter as long as that chicken keeps laying eggs.

I think a gold standard or hard asset standard would limit the printing press and thus limit the severity of these cycles whether it the ups and the downs that bother you or the fact that your savings are stolen from you via inflation.

You can still have liquidity and factional reserve banking with a gold or silver standard. And yes more gold will be mined so their can and will be some inflationary forces. I'm just suggesting that a little less Nanny state and we'd all be much wealthier and better off. Except for the foolish which is my point.

[damienhaas]

Actually all these arguments are useless, just wait around 6 month to 1 year and we probably will see whom got it spot on.

[Travis]

The Fed DOES back the dollar - by you and me. The American economy and government is strong enough to attract foreign investment even now when treasury yields are so damn low. If the dollar is so weak, why is China and Europe STILL buying treasuries in LARGE amounts?

The simple fact that these doomsayers here haven't moved out of the country is the same reason why foreign investors still buy our debt... if its so bad, and you are still here, it sure says a lot about the faith in the US's position in this global economy.

And for the people that want our currency backed by some sort of commodity... tell me what commodity and where it would be stored to back the trillions of dollars in the world.

I don't see how people can argue that changing to a fiat system hasn't helped global expansion, increase in wealth, standard of living, and prosperity tenfold.

johngonole says:
"The idea that we inflate our currency regardless of whether it is to fight off deflationary spirals or simply to avoid the next recession creates the opposite affect which I will term the moral decay spiral. These constant bail outs are providing incentive for irresponsible behaviors of every kind. More criminals, more irresponsbility, more debt, more of everything that caused the need for the printing of more money in the first place. This is the cancer that cachaca refers too."

You must realize that if the Fed did not come in and help restore confidence in our credit market and save our system from grinding to a halt - we would be in very dire straits right now. As much as bailouts shouldn't occur - free market economics is not perfect enough to protect society from greed. Greed is what caused all these rating companies to over-rate MBS, it is what caused the incredible leveraged investmet vehicles.

But its not like these "bail outs" have replaced all the dollars in these greedy bastards pockets. Do you think Bear Stearns feels bailed out when it goes from 50 billion in market share to 236 million in a week? These "bail outs" don't bring things back to what they were before, they only help ease the fall so it doesn't crush everyone from Wall St. to Main st.

[Michael B. Krause]

Yes. This 'bail-out' just prevented, as Meredith Whitney of Oppenheimer speculated, a 2.5T forced unwind (imagine the cascade) of credit default swaps.

The err here is that of the masses blindly following the quants in the quest that greed guides. That, by the way, is capitalism. Judge for yourself the errors of capitalism.

As far as John's arguments of money supply: My point is that there has been a gigantic amount of monetary destruction going on. The reigning of credit is monetary destruction. When the reserve base falls (as it has due to these bank losses), the total money outstanding is significantly less. Its just like a multiplier reduction. Now even with a new risk assessment mentality, w/ banks being afraid to even loan to each other, low interest rates is not significantly ramping up money supply. Its just helping reduce a barrier of functionality in the system.

A deflationary environment provides no incentive to run a business. Why invest if your future returns on investment will not pay for your current investment? If you want gold standard, no fractional reserve, etc. then you want a socialist system. Capitalism vs. socialism is another argument for another place.

But certainly, a strong currency with little innovation is fundamentally sound from the point of view of the fact that no progress yields little in the way of health care tech advances. You're right: you won't need to worry about retirement with a gold standard currency because you won't live more than a few years past working age.

[Michael B. Krause]

correction: low interest rates ARE not significantly ramping up money supply.

typed a little too quick.

[nScout]

"The US Dollar is still a fundamentally sound currency", "But all of those problems are fixable"
Is it not a contradiction? Or just wishful thinking? Precisely because US leadership has proven incapable of fixing these problems and does not show any inclination to do so, the $ will slide further. As to the warped US financial system just read the following article "Searching for the cause of the crisis on Wall Street"
By Nelson D. Schwartz and Julie Creswell Published: March 24, 2008 in the International Herald Tribune (www.iht.com/articles/2...;.
The US is in deep trouble and it is not an ever optimistic mental bent that will fix them.

[nScout]

to Michael B. Krause.

Must point out that the Swiss experience totally contradicts your last point as you can have stability of prices and currency and a dynamic and imaginative industry.

As to the $ money supply the FED's bail-outs replace the lenders who stepped aside, so the money supply is the same as before the credit crisis and thus remains still at the bubble level.

[User 167683]

"The gold standard was a resounding failure as the US was trapped in a deflationary mire for decades on end, holding back economic and technological innovation unnecessarily."

Sorry, but this ignorant statement basically precluded any possibility of my reading this entire article. Booms lead to busts. No mystery. The boom that preceded the Depression of the 30's was called The Roaring 20's. The Naughty Nineties was the period that preceded the Tech Bubble. And Bust.

The absence of a gold standard, it must be pointed out, has in no way prevented the Japanese continuing to suffer a deflationary economy for over a decade (so far), following their own Kamakaze Boom which led to the bizarre hallucination that the emperor's palace grounds were valued equal to that of the entire state of California. (It isn't recorded how highly were valued the emperor's new clothes.) Property prices have since fallen by 50%, leaving many homeowners with mortgages far in excess of property value.

Mr. Greenspan evidently thought he could indulge the same loose money policies and secure a different outcome -- a reasonable definition of insanity. Now it falls to Mr. Bernanke to help Wall Street and the government escape their mutual collusion of greed and misadventure by eagerly offering to drive the gettaway car.

Shame.

[User 167693]

You are absolutely correct about gold, to buy gold at this point in the market is just foolish. It would be a incalculably better investment to purchase an alternative energy system for your home and/or a battery powered electric vehicle.

However, to label Ron Paul people as "merely blind trend followers", is uncouth. Surly you are aware of the stability of Swiss currency...

[Chuck]

BULL FEATHERS.
3.3 Grams of Gold = 1 Barrel of Oil.
Always did, Always will.
The more money the mint prints, the smaller the value of the US Dollar.

And concerning the Innovation will save us in the US of A.
We invent, They create it, and produce it and sell it to us.
We = USA
They = China, India and the rest of the 2nd World.
and They use the 3rd World as labor.

We're going down, down, down, and I'm depressed.

[flyoverman]

Although, in the long run we are all dead....The death of the US economy has been greatly exaggerated.
The roads are packed with our SUV's. Yes, the kids need nice cars too. Restaurants are quite busy and the waistlines quite large for a poverty-stricken people. It seems the media loves economic catastrophe, maybe so they can get the change of political power they want.... but, at least where I work, profits are up and productivity is definitely up. Our business does more with less every year.... I guess that's capitalism. People who get educated and actually work are doing quite well.

[flyoverman]

Although, in the long run we are all dead....The death of the US economy has been greatly exaggerated.
The roads are packed with our SUV's. Yes, the kids need nice cars too. Restaurants are quite busy and the waistlines quite large for a poverty-stricken people. It seems the media loves economic catastrophe, maybe so they can get the change of political power they want.... but, at least where I work, profits are up and productivity is definitely up. Our business does more with less every year.... I guess that's capitalism. People who get educated and actually work are doing quite well.

[CarlosSlim]

People who think that the "gold standard" will save America are insane.

Think about it.

Why limit the economy to the finite ammont of gold in Fort Knox?

Sure, they could play games, such as making each $ backed by 1/10 the value in gold, but those are just that....games.

The ONLY reason the $ is worth anything right now--after 7 long years of destruction at the hands of the Bushvistas--is that all oil is paid for in $.

Take away the petrodollar support and it's look out below!

[Tess]

Cheapybob: I agree with you totally, this author is full of [Comment edited for abusive language. Commenter put on notice]

[triznix]

Nobody is claiming that going back to a gold standard will "save" the country. All we are saying is, if you want to save YOURSELF, it would behoove you to stop drinking from the punch bowl.

Also, just look at Michael Krause's credentials...or, should I say, lack of credentials. an "economics blogger" whose only professional claim is that he co-founded an ISP during the tech bubble????

Give me a freaking break! Although it is fun to rail against propagandists like him.

[frflyer]

The hidden cause of the housing crunch is the diparity of wealth in the U.S. No one want to talk about this, but it is a major factor. Flyoverman says people who get educated and actually work are doing quite well. Well maybe some people, but he fact is that trickle down economics has been nothing of the kind. In fact it has been more like Niagra Falls flowing uphill.
Working class people haven't had a real raise in buying power in about 35 years.

"Of the total growth in real income between 1982 and 2003, almost a third accrued to
the top 1 percent and 80 percent by the top quintile, with remaining 20 percent distributed
among the bottom 80 percent."
"The growth in the economy during the period from 1983 to 2004 was concentrated in a
surprisingly small part of the population—the top 20 percent and particularly the top 1 percent."

"The average nonhome wealth of
the richest 1 percent almost doubled, that of the next richest 4 percent more than doubled, and
that of the next richest 15 percent by about 90 percent. Altogether, the nonhome wealth of