“It’s all relative” – Albert Einstein
When I was in college I went with some buddies to a restaurant near Charlotte (we were on a weekend road trip from Chapel Hill – though I cannot, for the life of me, remember why we were in Charlotte). One of the waiters was an aspiring magician and asked if he could do card tricks for us. “Why not?” I will admit that the guy was pretty good at sleight of hand. About midway through his routine I forced myself to look away from whatever he was showing us, to intentionally look and see what his “off hand” was doing. I discovered in this that the tricks were obvious. He was clearly moving things around and setting up the next “ah-ha” moment with the hand he didn’t want us to see, while showing us what we thought was important with the “show hand.” It was kind of impressive, and also very telling. The trick was never about doing anything cool, it was all about getting the audience to look away while you did something ordinary, to look at the somewhat interesting “show” you were presenting them while you did the real work out of their sight.
I’ve caught a few articles lately about the coming “collapse” of the value of the dollar. These aren’t just from the “gold bug” types who think the dollar is always in collapse and one should own gold and nothing else. No, the mainstream press has been getting involved, warning that the world is going to “lose faith” in the dollar because the US government is inept, running massive deficits, and shutting the government down from time-to-time. It all feels like the “show hand” to me. Seems like they want us to look at precisely the threat of dollar implosion, so we don’t see anything else happening. I’m not biting.
Charts & Graphs …
A few charts and graphs for you this morning, dear reader. When it comes to “value” of the dollar we must consider value versus something else. There is no intrinsic value to the dollar bill, or gold, or stocks, or any other asset class – only its value relative to another asset class. So, let us consider the value of the dollar relative to stocks (the S&P 500), gold (I’ll use “GLD” instead of the spot rate because the data series is more readily available on yahoo), and several other currencies (Euro, Pound, Yen, and Aussie Dollar). First, we go back to 10/1/2007, the stock market peak before the financial crisis. (Click for sharper image.)
If you were sitting in your living room with $1000 laying around and nothing much to do on the day that the market peaked in 2007, your best bet was to buy gold (instead of keeping the dollars). The dollar has indeed fallen significantly versus gold since then. The stock market crashed and recovered in nominal dollar terms (which is what we’re talking about here, since it’s all relative), and the “safe haven” Yen has performed well. The Aussie is up slightly, Euro down slightly, and Pound down a fair bit.
At this the gold bugs will shout “see, gold is the only safe place to store your money, the Fed is going to destroy the dollar, buy gold now before the apocalypse!” The stock market bull will note that I have chosen the prior peak for stocks, which is a bit unfair to the S&P. Very well, let’s choose a different date. Let’s choose the ominous 12-12-12, the date the Fed expanded QE-infinity to $85,000,000,000 a month … forever.
Holy enchilada Batman, what just happened? The Since 12/12/12 the Fed has been printing $85,000,000,000 a month and the dollar has strengthened versus gold, the Yen, and the Aussie, and only fallen modestly versus the Euro and the Pound? But I thought the Fed was going to destroy the dollar? It’s all relative.
Money Creation and Destruction …
At the risk of angering Austrians I will say here that I like Mish’s explanation of “money supply” the best – money is cash and credit, with credit marked to market. In the US this primarily means credit, because cash is a small portion of the money supply. If new credit (money) is created from thin air when banks “lend it into existence” via fractional reserve lending, then it is also destroyed out of the same thin air when loans are paid off (“deleveraging”) or when the loans themselves are vaporized (“defaulting”).
So, are we likely to print more money, and lend more into existence than we are to deleverage and default? I don’t know, but I will say that attitudes amongst the average citizen have changed a big. Normal folks aren’t running out to take on more and more debt, they are deleveraging (and some are still defaulting).
“But Nomasir, I thought you said that money printing and inflation is the means by which the Fed transfers money from the poor to the rich.” I did, and I still do. The money creation and destruction process is hardly equitable. When the banks started getting wiped out in the housing bubble collapse the government stepped in to bail them out; first by directly taxing the people and giving it to the banks (TARP) and then by printing money to purchase the bad assets (QE-infinity). If we should experience a bit of deflation (in terms of money and credit, not necessarily prices) the Fed is still working to transfer the shrinking money supply from the poor to the rich.
Sidebar: I caught an article just yesterday that said the US government is collecting much more revenue these days, and that spending only exceeds revenue by around $56,000,000,000 a month. When we were deficit-spending $85 billion I viewed QE as simply the Fed monetizing the debt, but what about now that we are only deficit-spending $56 billion? We’re printing up more than we’re spending. The banker appetite for free money and moral hazard is insatiable … I guess they’re just “doing god’s work” (though they serve a different god).
Don’t take any of this as investment advice … please don’t – I have hardly proven myself an investment guru. I’m simply saying that I don’t believe the “dollar collapse” meme that is being pushed. If the dollar collapses it has to collapse versus something else, but what? Gold, stocks, gasoline, milk, bread, the British pound? (Furthermore, if the answer is “gasoline, milk, and bread” then I ask exactly how one expects to store such commodities if they want to convert their dollars now?)
Stand with Rand …
The federal government requires, in a soft sense, that all people have dollars – it is the only form used in paying taxes. (Beyond that it is the only reasonable means of transaction in the US, though transactions are hardly required by law.) The unelected Federal Reserve has unassailable authority to devalue the dollars American citizens are required to hold. This is clearly and simply taxation without representation.
“But the Fed chairman is appointed by congress!” Yes, the chairman is, but the board of governors is not. They are the ones who can vote on policy, and we have no capacity to change that membership via the ballot box. Taxation, without representation.
How do we fix it? There are a number of ways. The most obvious is to institute a gold standard – then the Fed can’t “print” any more dollars unless they are backed by gold. And I would love to see helicopter Ben out there digging for gold so he could print some more dollars.
A solution I have proposed over the years has been the elimination of capital gains taxes. No, it doesn’t prohibit the Fed from printing at will, but it also allows people to move their savings into other asset classes at will in order to avoid the Fed tax.
Then there’s the option of nationalizing the bank – we simply seize it and take over. I don’t support this option. The Federal reserve bank is committed to serving the god of money, to making the rich richer and oppressing the poor along the way – to serving evil purposes against men created in God’s image … but at least they’re not Congress.
Rand Paul has announced that he intends to place a “hold” on Janet Yellen’s nomination as Fed chairman unless the Senate agrees to vote on a bill to audit the Federal Reserve. I whole-heartedly back this move. An audit doesn’t end the Fed’s tyranny expressly, but shining a light on a dark place is a great first step.
I don’t expect much to come from this, of course. The powers-that-be are highly unlikely to let that bill come to a floor vote. Senators will have an untenable choice: betray their masters in the Wall Street banking class, or betray the rightful authority of these-here United States: we the people. Nobody wants to be on the books voting against a simple audit. “If you have nothing to hide, you have nothing to fear!” But nobody wants to be on the books voting for it – especially if it passes. While I don’t think it would end the Fed, there is a real possibility that the Emperor has no clothes.