Tuesday, March 13, 2012
Dollar and debt...no correlation
Here is a chart of the total US debt vs the dollar against a basket of major currencies (yen, yuan, Canadian dollar, Swiss franc, euro, Mex peso, Taiwan, S. Korea, etc).
Start the analysis from 1971, which is the date when Nixon took us off the gold standard and it’s the date where the “money printing” crowd claim all our problems started.
So here we go.
The debt went from $700 bln to $6 trillion by 2002—a ninefold increase—and the dollar gained over 300% in that time against this broad basket of currencies.
From 2002 until now the debt increased by 250% and the dollar declined about 23%.
Aha! you say...that proves the link between high debt and a falling dollar.
No it doesn't because a closer look at the chart shows that since 2008 (the start of the financial crisis), the debt really went parabolic ($9T to $15T in 3 years!), yet the dollar actually went up. (Dollar Index in 2008 around the time of Lehman, 95.9. Dollar Index today with debt 170% higher, 98.12.)
There's no correlation between the debt and the currency. I'll even go a step further and say that high debt growth is bullish for the currency if the debt equates to higher real output and not just higher savings (hoarding) of financial assets.