THE DOLLAR DEBASEMENT MYTH & THE FED’S BALANCE SHEET
Mike Norman just posted a very good fact based story on the relationship between the Fed’s balance sheet and the US Dollar. As I have often noted, the Fed does not print money. QE2 is not money printing. It is not debt monetization. It will not cause high inflation. It will not cause hyperinflation. It will not cause a dollar collapse. And three years into this massive Fed balance sheet experiment we have the facts. Mike notes:
Below I give you the US Dollar Index and the size of the Fed’s balance sheet.
Date Dollar Index ValueFed’s Balance Sheet
3/14/2008 71.66 $921 bln
7/13/2011 75.24 $2.9 TRILLION!
Words don’t do this justice though. I put together this chart showing the dollar index versus the Fed’s balance sheet over the last three years. As you can clearly see – there is no real correlation between the size of the balance sheet and the USD. None at all. This has all been proven correct despite my repeated ramblings, yet the inflationists and fear mongerers still garner all of the attention. Clearly, people prefer to be scared as opposed to being told the truth.
(As they say, a picture is worth a thousand words!)
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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122 Comments
Please explain what the dollar “values” (71.66 and 75.24) are in relation to. I get the point of this chart….. If the inflationistas were right the increase from 920 bil to almost 3 tril would result in a fall from 71.66 to about 20-25, I’m just wondering what is the reference point we are valuing these dollars against?
Thanks
It’s the trade weighted dollar. The low rate of inflation in the USA is consistent with this idea. There are basically no facts proving that the Fed’s balance sheet is destroying the dollar….
Thanks Cullen.
Googled Trade Weighted Dollar Index and got schooled some….. can learn something every day!
Yesterday afternoon on Gundlach’s call (not sure if you attended), he talked about a few weeks ago when he was in Chicago and meeting with — I think he called them — “a buncha’ recent MBA, hot-shot fund-of-hedge-fund managers, none of them over 30″ (his arrogance is charming at times, lol)…
he continued – and this is from memory, so I paraphrase: “they all proceeded to tell me the that the dollar, or anything dollar related was the worst investment one could make… I said ‘really? how much is the dollar down in the last three years?’.. going around the room the answers ranged from 20-30%. they were in shock when I told them it was UP in the last three years.”
Perception is reality for some.
He went on to say that he has zero non-dollar assets.
Isn’t that because the US has exported its inflation for now?
CR,
Been reading mostly, but not commenting. Hope all has been well. Are you a dollar bull at these levels? (UUP $21.46) It looks like it’s made a solid bottom, but what the hell do I know?
No FX positions currently….
BTW this chart SHOULD completely blow any ideas about the “Quantity theory of Money” out of the water….. unfortunately those bad ideas are hard to kill.
you mean “low”, not “zero”. M2 velocity is 1.7x
It should be pointed out that there has been an immense destruction of $ liabilities (shadow banking collapse) that has acted to strengthen the $ in this time frame. So, I wouldn’t be too quick to jump to the conclusion that there is no effect. That’s the problem with you Cullen – jumping too quickly at anything that purports to support your position. Maybe it does, maybe it doesn’t. Biases should be thrown away, keep an open mind. For the most part, you are right, but I wouldn’t be too quick to dismiss everything else.
What am I dismissing? I am showing the facts here. Deflation, as you mentioned, has bolstered the dollar. That is totally consistent with everything I’ve ever said here….I am about as open minded a person as you’ll find. I dismiss people when they cannot create a fact based argument. And thus far, I have yet to see any single shred of evidence from the hyperinflationists which backs their theory that the Fed’s balance sheet will lead to an explosion in inflation….
All I am saying is that the $ could have been far stronger with the destruction of $ liabilities and that Bernanke could have caused it from getting to that strength. It is a moot point, you are too wedded to the MMT position and are unwilling to consider other points. Read Van Hoisington’s letter.
I wanted debt destruction. I wanted the banks to burn. Again, you’re voiding your whole point by discussing things I was in favor of…..
Provide a data point to consider. Without data you are just babbling.
People want to believe the Fed is destroying the dollar because it confirms their preconceived notions and political ideology. That’s the only reason this crap garners so much attention.
Right. There’s been a great deal of work done on this with regards to human psychology. We make conclusions and then search out our confirmation biases. It’s human nature. Overcoming those biases is incredibly difficult and takes a huge amount of discipline. The people who do it have an edge as they tend not to fall in-line with the herd and follow them off the edge.
I highly recommend the following letter from Hoisington (mgmt)
http://www.scribd.com/doc/59953205/HIM2011Q2NP#
“monetary and fiscal policies have failed because government financial transactions are not the key to prosperity. Instead, the economic well-being of a country is determined by the creativity, inventiveness and hard work of its households and individuals”
This is misses the points that Cullen tries to show so often here. First, financialization has taken our eye off of the real productivity of the economy. Second, the government has not properly managed the currency in a way that allows the private sector to maximize its prosperity.
They overtaxed us in the 90s, drove us into debt and now we’re paying the price. Now, they’re trying to prime the pump, but they’re doing it through the Fed as opposed to deficit spending and it’s not having nearly the impact that it should. I really like Cullen’s theater example. We’re like the theater that has all this excess capacity and people can’t get their hands on enough tickets to get to the show. The producers of the show are all sitting around wondering what they need to do. Of course, they need to issue more tickets. The show is still wonderful (despite the financialization), but people can’t afford to go to the show because they have too much debt. What do we need? Lower taxes (more tickets at lower prices).
That is a good analogy, but you have to take distribution into account.
90% of the seats are $10 – regular seats , 10% of the seats are 90$ – balcony.
Now 90% of the theater is empty because 90% of the population is over taxed.
But the other 10% are full because 10% are under taxed.
To maximize profits, the regular seats must be cheaper until they are full and the balcony seats tickets must be higher until there is an empty seat.
That to do with the profits is another story.
Tax cut for all is a simplistic view which does not solve the problem.
excess labor is not the same thing as excess capacity.
We have excess labor in the USA? Really? Have you noticed the unemployment rate?
are you for real? a high unemployment rate, and low labor participation rate, means we have excess labor. You see, an “excess” of something is when you have more of that something than can be utilized. So, yes, the USA has an excess supply of labour relative to the demand for that labour.
I sometimes think people on this site would assert that the sky is yellow if somebody were to claim that the sky was blue.
Surplus labor is a Marxist concept. You obviously don’t know what it is.
“The distinction between necessary labor and surplus labor originated at the stage in the development of the productive forces of society when it became possible to produce more goods than were necessary to support the existence of the worker and his family.”
That is not the environment we have today. We have excess capacity. Not excess labor. You’re trying to convince people that the sky is yellow when it’s obviously not. Rather than practicing ideology it might help you if you actually understand things first.
Hi MMTer,
Could you provide a link that explains “excess capacity vs. surplus labor” in more detail? Thanks.
ditto that…having a hard time wrapping my head around that concept.
“Second, the government has not properly managed the currency in a way that allows the private sector to maximize its prosperity.”
WHAT!!!!!????? Are you kidding me. A CAPITALIST thinks that the GOVERNMENT is supposed to MANIPULATE currency for control PROSPERITY???
This is why this idiotic blog is full of crap. Do you really believe that??? That is then definitely NOT capitalism. That is the government picking winners and losers, Kinda like we are doing now, political aligned good, the rest of the 300 million Americans, can go screw themselves, they don’t work at banks or are. Economists, or work at universities thinking they are so intellectual. What a hoot this blog is getting to be just stupid.
You’re missing his point. Think of the govt (the currency issuer) like a theater. Outside production companies put on the show using the theater’s stage and pay the theater a nominal fee for the convenience, organization, promotion, etc. If the theater never issues any tickets (currency) the public cannot buy the tickets to see the show. So, in this regard, the currency issuer plays an important role. It has little to no role in the quality of the show. Just like a govt has little to no role in the quality of the economic output of the pvt sector.
I agree, Van Hoisington’s letter should put to rest the thought that fiscal deficit spending to infinity (MMT’ers key argument) and monetary stimulus to infinity (Bernanke’s argument) won’t work. I have always said “where is the value”, fiscal deficit spending IF channeled into productive use would create value but is actually ineffective and only creates bubbles.
If we want to see if Hoisington and the debt fearmongerers are right we should just stop spending any money into the economy at all. Let’s settle this debate once and for all. Stop all Federal spending of any kind. Let’s see what happens. When we’re in a depression in a few years you can come back and say “my bad”. Too bad none of us will have internet connections because we’ll likely be fighting each other on the street for scraps of meat.
Hoisington are “debt fearmongers? Really? Actually, Hoisington’s number one position is the long end of US treasurys due to deflation and continued weakness in the face of deleveraging.
Read the article before you start shooting
I read it. Including the part titled “The Debt Bomb” where they compared us to Europe and said that we would have our day of reckoning if we didn’t deal with the debt. I suggest you read it since you’re clearly the one who didn’t.
So, an investment firm whose number one position is the long end of US Treasuries are “debt fearmongers”. OK.
I think what we are witnessing here at Pragcap is ideology over fact-based analysis.
They correctly conclude that the major risk here is not inflation. You’re intentionally conflating the point. You can be a deflationist and still be worried about US govt debt levels….
you assert that debt does not matter because we issue the currency in which the debt is denominated. In the intermediate term, no arguments there. But – and it depends what that debt is used for – in the long run that might be what’s called a “free lunch”, and there is no such thing.
If our debt accumulation was for the purpose of investment, e.g. turning our population into “bionic men” and “bionic women”, capable of super feats of economic productivity, then one might not be concerned, because at the end of the day an economy is as strong and sound as the cumulative capital and labour standing behind it. But that is most assuredly NOT what our debt accumulation is being “invested” in; rather it is being spent on consumption of no lasting or incremental value to the economy. The debt accumulation is not increasing the future productive capabilities of the economy. Do you think there are no long term consequences to accumulating debt that was spent on present consumption? Can we issue unlimited amounts of debt for the purpose of consumption?
Pod,
It’s astounding to me that you comment on this website so frequently without even understanding my point. I have never said there is a free lunch. I have never said the deficit doesn’t matter or that the aggregate “debt” levels don’t matter.
Can you please soak this up and really learn it before you write comments like this?
http://pragcap.com/resources/understanding-modern-monetary-system
Cullen,
It’s astounding to me that you always play the “you are ignorant” card, and toss the link to “understanding modern monetary…”, as though it will enlighten the idiotic masses. I would be offended except that you do it frequently so I don’t take offense.
Cullen, is there some way to send you a critique of Understanding MMS? I just discovered MMT about 3 weeks ago, and have since been soaking up a lot of input and trying to digest it. When I came across Understanding MMS I was hoping it would help, but – well, not so much. You end by asking “still confused?” Yes. You also say you are updating periodically. I think you are trying to provide a valuable input, but for me, coming from a position of relative ignorance and no preconceptions, you need a major update/overhaul.
My critique is far too long to post here. If you would like to see it please advise me by e-mail. Murray
Murray,
Try the forum. That way I can get to it when I have time rather than cluttering the email box and forgetting about it……
http://pragcap.com/discussion-forum
Best,
CR
Cullen, you can’t dismiss Hunt/Hoisington bc they don’t explicitly differentiate btwn users and suppliers of currency. You’ve agreed with, and quoted Hunt/Hoisington before, but when they don’t show 100% communication and understanding of MMT, you dismiss everything else.
Fact is that your differences lie much in definitions/semantics than real monetary system understanding. They work from a context that assumes the gov’t expenditure multiplier is 1 I’ve heard on this site is that “it’s hard to measure”.
He’s not against Gov’t spending picking up the private sectors slack in a contraction, but he is against wasteful gov’t spending, just to spend for a quick fix.
and so are you. the difference lies in the fact that MMT, as far as I’ve seen on TPC, seems thinks most gov’t spending in times like these is “good” (has a multiplier >1), whereas Hoisington/Hunt say it’s “bad” (close to 0 multiplier) and just leaves us with more debt and nothing sustainable.
If an MMT’er instead ‘takes the leap’ to assume the gov’t expenditure multiplier <1, then one could that Greece not having the money to pay is in effect the same result as the US loading up on debt and causing a political/'loss of faith' in currency. Both destroy their economies.
something got messed up – paragraph should read:
Fact is that your differences lie much in definitions/semantics than real monetary system understanding. They work from a context that assumes the gov’t expenditure multiplier is 1. The best defense of that I’ve heard on this site is that “it’s hard to measure”.
for whatever reason, every time I try to use teh “<", 'less than one' sign, it gets cut out.
Hosington/Hunt assume multiplier on aggregate gov't spending LESS THAN ONE.
Swede,
I’ve trashed most of the spending policies that have come out in the last few years. How can you say that I assume all govt spending is “good”? You’re criticizing my point while misconstruing it….
sorry if I “rounded up”. MMT assumes the *gov’t spending as a whole* has a gov’t expenditure multiplier >1, while Hoisington/Hunt assume *gov’t spending as a whole* multiplier is <1, close to zero.
that is your only major difference in thought.
the fact that "user vs supplier" of currency isn't mentioned in every piece of opinion out there does not make it 100% wrong.
I actually maintain that the multiplier of spending “depends”…..And we differ very much in how we view “govt debt”. That’s abundantly clear from their piece.
yea it depends – the first dollar is likely has higher ROI than the last…
but anyway, maybe this will help me understand this last 5-10% of MMT I just cannot get past:
would there a major difference in the results — not the mechanics of, and aside from details — of what would happen to Greece if it defaults and gets kicked out of the EMU, and what would happen to the US if they go past your the ‘debt/deficit limits’ and there is a worldwide loss of faith in the US dollar?
let’s ignore the productivity etc and how quick one may recover vs the other — I’m just talking about “the day after”.
(Thanks for the great discussion. and your comments as well Peter D.)
Well, the USA can’t default as in running out of money. It’s just not going to happen. We could have hyperinflation. But that’s different from a default as can happen in Greece. So yes, the two are very very different.
I could not reply to this post, so I attache here:
Cullen: “Well, the USA can’t default as in running out of money. It’s just not going to happen. We could have hyperinflation. But that’s different from a default as can happen in Greece. So yes, the two are very very different.”
I think most folks you so vehemently disagree with do not see a difference here. Yes they are different, and mechanically so, “very very” different, but tantamount to the same thing: destruction of economy and purchasing power. no?
that is, if the US borrowed from its future productivity and production to the point that the currency ‘breaks’, does it not need to regain that confidence by paying back (reducing, whatever) somehow? isn’t that the same rebuild Greece would have to do after leaving the EMU and starting its own currency? rebuild confidence? by lightening on the leverage?
History shows that the two events are quite different. Default occurs to an entity that cannot meet its obligations. Hyperinflation occurs in nations experiencing regime change, loss of war, incurring foreign denominated debt or corrupting its monetary system. The high debt levels that occur during a hyperinflation are always the result of these exogenous factors. So, to be very precise, yes, they are very different events. They might result in the same thing, but it’s a lot like calling cancer and AIDS the same thing because you die after each…..
you nailed it. yes, I would just call it death, rather than Disease A and Disease B. I think a lot of folks would (not saying I’m ‘right’). That was the Stiglitz/Hendry disagreement in a nutshell. To us who look at it as “death”, it’s nothing more than semantics.
thanks for taking the time, Mr R.
To us who view these problems as curable we find it very important to properly diagnose them so as to ward off death. Regardless of what might cause it.
So you cure cancer or AIDS with the same treatment? No, you don’t.
It’s important to know if you’re talking about A or B, because the prescription can be very different.
That’s the whole point….
MMT nowhere assumes that govt spending multiplier is greater than 1. This is outside the realm of MMT proper. What MMT does say, in the words of Warren Mosler, is that “for any given size of govt there is a level of taxation corresponding to full employment”. Thus, having high unemployment means that the economy is either over-taxed or are under-spending (in aggregate, naturally). All the discussions about efficiency of govt spending are secondary.
I for one believe that there are a lot of place for govt to spend even with multiplier less than 1 (or unquantifiable) for such things as public purpose and social safety net.
Nice summary. Others (such as John Taylor) claim that the fiscal stimulus of the last few years has just been saved. Multiplier << 1. In some sense, one could say from this perspective, that stimulus just changes the private balance sheet. I think this should be done differently, by just reducing people's debt directly; it's all accounting shell games … the Fed balance sheet vs. bank "losses" … which are all the same in the case of Fannie/Freddie.
I see in the last paragraph hoisington is “fully committed to the long end of the Treasury bond market.”
It sounds like they don’t even believe their own BS.
But they sure are getting a lot of attention from some people. Nothing sells like fear.
If one were “selling fear”, and also selling investment advisory services, one would probably not be best served by “selling fear” about an outcome which is diametrically opposed to the recommendations of one’s investment advisory services.
They’re selling their ability to help clients navigate this scary world. It doesn’t matter if they advise people to take seemingly contrary action. They will explain it away as they go along. After all, you (client) should listen to the experts you hired because you’re too ignorant to know better!
you didn’t read it very well John. they have a long term view (deflation/rates down), and a longer term view/risk (debt to the point the currency collapses) that they are addressing.
So you should buy 30yr Treasuries? Nuts.
the discussion last spring after QE1 ended was not much different than it is today. and Hoisington’s view on things was pretty much the same.
they said “deflation, be long USTs”. everyone else said “they are Nuts”.
they made 82% annualized from April to Aug that year. net of fees.
Exactly.
So, if we’re a long term Weimar, why do we buy long duration treasuries?
Oh Yeah, they’re killing it! Check it out below! They really are destroying their benchmark!
——————————————–
Wasatch-Hoisington U.S. Treasury Fund
5-Yr Annualized Return: 7.32%
Expense Ratio: 75 bps
https://secure.wasatchfunds.com/en/Our-Funds/Overview.aspx?fund=WHOSX
———————————————
Vanguard Total Bond Mkt Index Fund
5-Yr Annualized Return: 6.43%
Expense Ratio: 22 bps
https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT#hist=tab%3A1
——————————————
jswede,
Here is another comparison!
If you bought Vanguard Intermediate-Term Treasury Fund (VFITX) shares 3 yrs ago as of 6/30, you would have outperformed Hoisington (WHOSX) 6.27% to 5.88%!
Hoisington = OVERRATED!!!!
I’m sorry you felt you had to misrepresent Hoisington as masters of the universe. It really doesn’t help your case.
Maybe you should research more thoroughly before making misleading statements about them or MMT.
Hoisington is long/short USTs. That’s it. As such they did not benefit from compressing spreads like Vanguard. It was tough to beat a total bond market fund in the last half decade / decade.
Hoisington chooses to not wage on relative value (ie ‘spread’) in fixed income. just a choice – as such that recent performance was not available to them – yet they still beat.
I respect Hoisington a ton bc IMO they are the ultimate macro fund – all growth/inflation expectations. I say long/short, but they actually never sell short – they go short on the curve – as in bills, and then time the market as to moves into the 30yr, and back.
Anyhow, I never called them ‘masters of the universe’ nor did I ‘misrepresent’ MMT. I will ‘think’ though. Likey not get into a discussion with you again
Let me be very clear that I am not saying I do not respect Hoisington. I very much do and I have praised them on many occasions here. I simply disagree with this one point of theirs. I know you’re not pointing this comment at me, but I want to be very clear that I have huge respect for most of the people I take the time to argue against. Gross, Gundlach, Bernanke, Obama, etc. Disagreeing with them doesn’t mean I am disrespecting them…..It is never my intention to make things personal. Merely to show others why I believe someone else’s argument is incorrect. I hope to always do so in a fact based manner and not a manner which directly disrespects someone else through the use of ad hominems or weak evidence….
I apologize for coming on so strong. I guess I didn’t appreciate your dismissive tone.
My problem with Hoisington is that their rhetoric doesn’t seem to match their actions.
I’m actually long some long-duration treasuries.
While “overrated” may have been a little much, they still don’t seem to add a lot of value to investors in the short or long term. This was my point in posting their return numbers (index & trsy funds) in response to your one trade annualized.
Thinking is great. Thanks for the tip.
cheers John. let’s discuss again soon.
I never advocated dropping the ball and stopping spending (upon rerading Hoisington I don’t see them advocating it either). That would indeed be harmful. The problem is with you – just spend away w/o any regard to consequences. THAT is the problem. Of course the govt should spend, but only in conjunction with destruction of useless past debt (and if the banks go to hell, so be it). Fiscal deficit spending should be used to cushion the blow (there will be a blow, what do you expect, a free ride to be “saved” by the govt after the Americans spent wily nily and bought Mc Mansions?). But here, the policy is no blow (except for the poor who suffer from high food and energy prices), let us stimulate the borrowing again, let us keep doing the same things again. UNLESS there is a blow, people won’t learn, so yes, spend on automatic stabilizers and cushion the blow, but stop this charade that fiscal deficit spending can just solve all our ills and make everything just go away!! Gee, MMT gone berserk.
Okay, how many people are going to write some form of this comment today?
I have never said that. I was against the majority of the spending programs that this govt implemented in the last 3 years. If you’re going to criticize please know your opponent. Thus far, most of the nonsensical responses are nothing more the misperceptions of my points.
This is false. The dollar index is just that, made up of its relation to other currencies. When all fiat currencies are at a race to the bottom, one cannot relate inflation outcomes to a chart of the DXY and expect to gleam some understanding. Of course there is no relation in that chart, because it simply has no relevance. Gas could be $30 a gallon, gold at $5000 an ounce, food 500% higher, the fed balance sheet at $10 trillion and the DXY at $73. What would that then tell you?
We can cherry pick prices also. My house, which is by far my largest asset and monthly expense, it almost 40% cheaper than it was a few years ago. But you expect me to believe that the dollar has collapsed because my gasoline and dinner are more expensive? You’re just cherry picking. Inflation is not high by any metric except the Shadow Stats method.
So your point is that this obvious lack of data correlation doesn’t matter because of huge amounts of inflation that isn’t occuring? I must have mis-read your point, can you give an example with something concrete as opposed to the fictional data points you mentioned?
I agree with John here. I don’t think that you can draw your conclusion from this chart. I have heard it described that fiat currencies are like falling hot air balloons. When one falls more slowly it appears to be rising in relation to the others. That the US Dollar Index is higher now than in 2008 just means that the dollar has been falling more slowly when compared to the other currencies in the basket.
Your simple chart belies the fact that many other factors simultaneously drive the exchange rate, and so pairwise correlations will be weak or unstable. For example, monetary velocity was an important factor in 2008, as the global scramble for liquidity drove up USD.
Sometimes I really wish there were a relation and we didn’t just randomly share a last name. I could use the help explaining this stuff to family members all the time.
well, my house is valued at twice what I paid 10 years ago for it, even in this market, so……….
If we change the timeframe from 3 years to 10 years we could also prove a correlation between my height and federal spending. We are talking about a very specific time period here. Changing the figures on the X axis is like starting a new debate. But just for fun, I’ll one up you. Inflation has been 2.5% over the last 10 years. So you still don’t have a leg to stand on.
http://2.bp.blogspot.com/_cvdgPlEKW9k/SqRnntuJ1KI/AAAAAAAAArQ/H7uQrGQFhMM/s1600-h/Down.JPG
I like that rainbow picture, its pretty.
What’s the source there… as in where is the data to support the picture?
Er, Cullen … your chart looks very familiar. Similar to all the others being thrown up on the screens in 2007 explaining how lax mortgage underwriting in 2004 through 2006 wasn’t leading to banking failures. :–) Food for thought.
in which country has inflation been at 2.5%, or are you drawing from the governments data mining efforts to describe inflation. If you use the data you are given, then inflation will always be at 2.5%.
The ECRI shows falling inflation for the last 5 years. http://pragcap.com/wp-content/uploads/2011/07/ecri_fig.png
Where do you get your inflation data from? The same person who has been wrong about hyperinflation for 5 years running?
OH COME ON. There’s totally a correlation…
…with the dollar index as the dependent variable and the base as the independent, the trendline formula is…
y = -0.0002x+75.63
..and the R^2 is a mighty 0.001.
Generally the strength of the dollar is correlated to the Tbill rate. The low real rates drives investors to seek higher yielding foreign bonds and it is also a reason gold is doing well. The fact that real rates low/negative are driving investors to put their “cash” holding into gold to preserve the purchasing power.
That said, I’m not sure what the best time frame to use for the chart. For example, this chart tells a different story (and acknowledge the interesting 2008 anomaly). http://grandfather-economic-report.com/m3-vs-cpi.gif
The change in M2/M3 correlates to inflation. And inflation erodes the purchasing power of the dollar. Unfortunately this quickly becomes an debate of hyperinflation but even moderate inflation compounded over years is destructive to purchasing power. http://nowandfutures.com/images/m2m3_cpi_money_supply.png
The now and futures site also correlate the USD to trade budget and deficit. http://nowandfutures.com/images/tic_trade_budget_usdx.png
Inflation has been LOW over those periods of time. Inflation is a natural part of a health economy when it is at low levels (but historically those acceptable/healthy levels are ABOVE what we’ve been experiencing….)
Just because the USD ‘inflates’ over time does not mean its purchasing power has eroded unless what it buys you has stayed the same or eroded in value….
Example: TVs are SO much more expensive than they were in the 60s on a $ to $ comparison…. and there is a HUGE difference in a TV from the 1960s and a TV from 2011.
Same for Healthcare.
Same for most products.
The store
John,
For the love of productive discussion & argument learn to use the friggin reply link on comments…
And so a store that you personally visit is a better data set than… oh… say the 20k+ stores that go into the CPI?
Seriously?
“As you can clearly see – there is no real correlation between the size of the balance sheet and the USD. None at all”
Neither the Fed’s balance sheet, nor the “monetary base” [sic], is much of a factor in the determination of the dollar’s exchange rate (esp. in the longer-term). The primary determinant of the dollar’s conversion ratio is the yield curve in the very short-run & the U.S. current account deficit in the long-run (now @ a cumulative figure of $8.2T).
“The now and futures site also correlate the USD to trade budget and deficit”
The “foreign trade deficit” & the “federal government’s deficit” have an insidious, if not an incestuous, relationship. Positive interest rate differentials in the past have been significantly responsible for the dollar’s exchange rate support. And in turn an “overvalued” dollar is the principal contributor to our burgeoning trade deficits.
Ludicrous! The Fed does not print money?
You need to get your head examined!!!
Shame on you for putting out this garbage; it is because of people like you that Americans are being robbed blind by the banks.
Either you are clueless or you are a liar – both are bad scenarios.
Wow, so many facts and statistics to back up your argument. Where to start!
If you at least read this and try to understand the Modern Monetary System before telling someone they need to have their head examined we’ll have a much more productive discussion here…
http://pragcap.com/resources/understanding-modern-monetary-system
Cullen,
You are SO wrong – it is not even funny.
Good luck to you and all the other MMT, deflation, ‘Fed is a saint’ believers.
Why don’t you admit your mistakes and change? It’ll benefit u and your followers.
Please cite those mistakes and incorrect points or no one who doesn’t already agree with your stance will even consider your point.
And how much do you actually read on this site? Cullen bashes the Fed on a weekly if not more often basis…..
Of course, at this point I have to assume you mean that Cullen, and others, don’t disregard their data like Williams at Shadow stats does…. Invest on his advice over the past 3 years and I bet you’d be broke.
The dollar was so much stronger in 1937.
Let’s adopt the policies of that day!
We can grab our cans of pork n beans, blankets and cardboard boxes to live in. We’re going to need it with such ignorant policy.
It is no good comparing the US$ against other currencies; they all have, to some degree or an other, monetary expansion. Look at chart of gold in US$ then you get some idea of the truth, although not absolutely in manipulated marlkets.
Please correct me if I am off base here, but I have always looked at the FED balance sheet as a sort of jail for misbehaving assets. An Iron clad jail that does not release offenders until it is guaranteed that they will not cause inflation or recession. The FED Balance sheet is not the money supply because the assets are not in play. Quarantined ????
Cullen,
What is the downside of the fed’s expanding balance sheet?
That they keep sucking interest out of the pvt sector while encouraging speculators to cause cost push inflation…..
Why would they want to cause inflation…would that not defeat the goal of turning the economy around?
It’s amazing that many commenters can not understand the following factors:
- the private sector has a varying, but generally positive preference to save USD
- in order to maintain the level of USD circulating (i.e. the amount that is not saved) over a period of time the US govt must run a deficit over the same period of the amount saved by the private sector
- it follows that the amount of US govt debt outstanding is going to increase over time
- adopting fiscal austerity as a result of misplaced concern at the amount of US govt debt outstanding can only decrease circulating USD
The US govt is eventually going to spend it’s way out of this mess or it will never get out.
Those of you that can see the logic of the above but somehow believe the “purge” of a massive deflation is a good idea might want to consider building a high wall with moat and drawbridge around your property. If you get your wishes you’ll need it.
there are other factors affecting the dollar. markets are also “forward looking”. how about using gold instead the dollar? what happened to gold today, upon the feds announcement of more stimulus?
their is a clear correlation on the chart, the dollar actually leads as it should, and as markets do.
the Fed operates a Ponzi scheme that received $8.4 TRILLION from the Treasury security auctions last year and hid the entire income from Congress. Sounds like embezzlement to me. Ref. http://www.freepatriot-press.com/2011/06/rip-off-by-federal-reserve.html
The author clearly does not understand monetary operations…
http://pragcap.com/resources/understanding-modern-monetary-system
The UK Sterling index shows exactly the same. During the period of UK QE (March 2009 to Feb 2010) Sterling appreciated against other currencies a little. It is broadly the same now with very little change up or down.
For me, it seems common sense that the basic assumption that is not being challenged is the question: will the debt purchased be repaid with Dollars that are worth an equivelent of the present value.
The second issue not addressed is that the Fed’s distortion of the interest market makes yields more attractive elsewhere in the world, having the same effect but for a different reason. The net for the everyday Joe is: How much value does a US Dollar really have if you can’t get a interest rate return in the marketplace?