Monday, April 9, 2012

The often repeated, BS line that the Fed is "debasing" the dollar



Just heard Steve Forbes on CNBC that the Fed must stop "debasing" the dollar. Debasing. What the hell does that mean, anyway? The dollar has no "base" to begin with. So here I go again showing how this line--which is used often by the likes of Forbes, Jim Rogers, Schiff and all the other economic airheads--is a total bunch of crap.

The Fed started really adding reserves (that's Forbes' definition of "debasing") around the time of the Lehman crisis in 2008. Reserve balances then began a meteoric rise, ending up at the current level of just below $3 trillion.

And what happened to the dollar?

It went up.

Take a look at the Fed's broad trade-weighted dollar index. This tracks the dollar's exchange value against currencies from regions or countries like, the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia. As you can see, these are lots of countries we do business with.
















When the huge increase in Fed activity began (Forbes' "debasing") this index was at 95, roughly. Today it is at 99. That about a 5-percent INCREASE. Forbes and the rest of the crew, like Rogers and Schiff, continue to repeat this dollar debasing line without anyone ever correcting them. Let them stand corrected as of right now!

34 comments:

Matt Franko said...

Cue 'The Prospector': ... They're debasin'!.... printin'!

LOL!

Anonymous said...

Mike,

As I'm sure you know, debasing refers to the fact that the dollar is worth anywhere from 1 to 3% of what it was 80-100 years ago. Showing that is is even or higher than other fiat currencies misses the point entirely.

geaf said...

No, it doesn't. Their claim is that the Fed's QE activities cause the value of dollar to fall. They don't.

And anyway, what do I care if a 2012 dollar is worth 3% of a 1900 Dollar? I get paid in 2012 dollars, not 1900 dollars.

It's like saying that inches are better than centimeters because inches are bigger.

Broll The American said...

What is the monetary explanation for what happened between 2002 and 2008 that caused the dollar to lose 30 points?
Was the expansion of consumer credit weakening the dollar?

Tom Hickey said...

"As I'm sure you know, debasing refers to the fact that the dollar is worth anywhere from 1 to 3% of what it was 80-100 years ago. Showing that is is even or higher than other fiat currencies misses the point entirely."

Which implies what, exactly. Yes, dollars saved under the mattress wouldn't be worth much comparatively in 1912 purchasing power. Dollars saved in long bonds in 1912 and rolled over on maturity would be worth what now?

It's just dumb.

Tom Hickey said...

@ Broll

Expanding trade deficit as % of GDP more likely. Floating rates in action doing what they are supposed to do.

Greg said...

Absolutely correct Tom. Excellent point

One other thing Ive started saying is that there must not be a relationship between dollar value and standard of living since our living standards have increased at least two or three times by any number of measures while the dollar has been "debaesd" using their measures

Bob Roddis said...

The dollar has no "base" to begin with.

False. Both Article I, Section 9, Clause 1 of the Constitution and the Seventh Amendment use the noun “dollar.” The Constitution does not define the “dollar,” though, because in the late 1700s everyone knew that the word meant the silver Spanish milled dollar. The constitutional “dollar” is a fixed weight of fine silver in the form of a coin.

http://www.youtube.com/watch?v=k6gMkKmQSW4

http://www.thefreemanonline.org/columns/what-is-a-dollar/

And what happened to the dollar?

While it recently went up against many other forms of funny money, it was diluted down against most real goods and services.

Of course, the primary problem with fiat funny money is not general price inflation, which is an inevitable secondary effect, but the distortion of unadulterated prices which are necessary for informed economic calculation. Further, the creation of funny fiat money out of nothing allows for the extra-judicial shifting of purchasing power from those holding the existing money to those receiving the new money first. Keynesians of all stripes would rather die than think through those basic Austrian axioms.

As John Carney wrote:

Furthermore, I do think there's a problem with MMT that cannot be confined to confusion.

The problem is as follows: MMTer are so focused on sectoral balances and the interaction between the private domestic sector and the public sector that they often downplay the intra-sector dynamics.*

Finally, MMTers do not seem to fully appreciate the problems of ignorance and calculation that inform Austrian economics. They seem to recoil at even thinking about them because of the implications for the limits of political action. This also needs to be corrected.


It is quite clear that Mr. Norman hasn't the slightest familiarity with "the problems of ignorance and calculation that inform Austrian economics" and "recoils at even thinking about them".

*Duh!

Bob Roddis said...

I omitted the link to the John Carney quote above:

http://tinyurl.com/7sycbey

Matt Franko said...

Greg,
Agree strongly with your inclusion of 'standard of living' vis a vis forex value of the dollar...

If foreign countries are delivering a higher standard of living in real terms to their citizens in comparison to the US, their currencies will strengthen vs the USD over this period.

Back then, EZ was enjoying a rising real 'standard of living' with great vacations and free medical care, etc... so the Euro rallied, now since they are implementing austerity over there and we here in the US are status quo, the USD has strengthened.

Same with China, if China increases the daily ration from 2 servings of dog brain soup to 3 servings, if the US maintains status quo, the Yuan will strengthen as it is a relative issue.

Resp,

Anonymous said...

It's like saying that inches are better than centimeters because inches are bigger.

I loled hard at this, so true.

the distortion of unadulterated prices which are necessary for informed economic calculation

Ridiculous, there is no such thing as pristine macro price stability due to the nature of money (Say law is wrong).

There wasn't under the gold standard ever, there hasn't been ever. It's funny, austrian economists which supposedly know of intrinsic universal uncertainty wanting to manufacture certainty with some sort of monetary voodoo (because falling prices due to constant quantity of money is neither stability) so it all comes together and perfection comes to fruit.

JK said...

Can someone here answer a somewhat unrelated question?

Does any entity in the Eurozone create new net financial assets? i.e. is there ANY money printing ever?

Or is all "new" money just credit created by financial institutions? And if that's the case, doesn't the fact that credit is created + interest lead to an inevitble debt collapse? That is, if no new net financial assets are ever created, isn't it then necessary for the financial sector to create more and more credit to "keep up" with interest payments, all the way up until some tipping point (where the house of cards collaspes, only then to be rebuilt)?

Also, I'd be happy to be directed to literature. Thanks.

Anonymous said...

"And anyway, what do I care if a 2012 dollar is worth 3% of a 1900 Dollar? I get paid in 2012 dollars, not 1900 dollars.

It's like saying that inches are better than centimeters because inches are bigger."

If you bought an asset 30 years ago and have to sell it now, with fed and state gains tax probably 15-20% of the asset is taken by the IRS. The gain doesn't mean I'm wealthier, it just is a by-product of a debased dollar. That's why it matters to you.

mike norman said...

The dollar looks like it has gone down because it's looked at in nominal terms. People say, a new car cost $2500 in 1971 and now it costs $30,000. But when broken down in terms of the number of hours of labor required to purchase the car, it actually takes less labor hours now than in 1971. Not to mention the fact that you get much more for your work. You get an engine that starts every time regardless of the weather, antilock brakes, power steering, air conditioning, power windows, power brakes, navigation perhaps, etc, etc.

So the dollar has not really gone down. In real terms it has been quite strong.

Unforgiven said...

"If you bought an asset 30 years ago and have to sell it now, with fed and state gains tax probably 15-20% of the asset is taken by the IRS."

Or 15-20% of the net gains, perhaps?

TheArmoTrader said...

Hey Mike/Tom
Might want to link to this post. It fully explains/debunks the muth of the "95% drop" in the dollar: http://realfactbias.blogspot.com/2012/02/no-dollar-did-not-really-lose-95-of-its.html?spref=tw&m=1

Dan Kervick said...

Does any entity in the Eurozone create new net financial assets? i.e. is there ANY money printing ever?

JK, the way I understand it is that each Eurozone member has its own national bank, but the monetary policy for the Eurozone as a whole is set by the ECB, whose sole policy mandate is price stability. The national banks can issue coins, but only in the amounts permitted by the ECB.

The ECB inject money directly into the private banking system through short duration repo contract auctions of short duration. Banks receives money from the ECB with a commitment to repay within a set period of time, but by increasing or decreasing the number of contracts for sale in successive auctions, the ECB can engineer a net injection of liquidity or net withdrawal of liquidity.

JK said...

Dan,

thanks for the response.

So, are you saying that no new net financial assets are ever created in the Eurozone?

Correct me if I'm wrong, but paper and coins entering the economy is typically just a response to the public's demand to hold them in place of demand deposits (for various reasons that don't need mentioned here).

I see the mechanism you're talking about for injecting liquidity, but is that really any different ..as far as creating new net financial assets.. as things like QE? Aren't these things just asset swaps? Or said another way, "money transfers" from less liquid to more liquid (or vice versa).

I understand there is no overarching federal government that deficit spends into the United States of Europe, but does that mean that no new net financial assets are ever created?

Tom Hickey said...

Where the drop in the USD is noticeable is traveling abroad. When I first went to UK and Europe in the 60's, the dollar was super-strong and living was good with dollars. That started to end in the 70's and now things are pretty much reversed. Americans are at a marked disadvantage in comparison with the way things used to be. Many factors contributed to this.

Unforgiven said...

But wait! I want to hear more about that stalwart Spanish Silver Dollar, from whence all austereian goodness and Angels and Unicorns spring forth! The one whose value stayed as constant as the hearts of the faithful! That is, until they decided to drop the weight and increase the face value:

http://goo.gl/axX1V

Come to think of it, when has the the weight or face value of specie NOT been varied?

Calgacus said...

JK, I think the way to think of it is that the ECB prints the money (or not), on paper that each of its administrative regions, formerly known as countries, supply to it. Albeit only after ritual purification of the paper by the the banking priesthood, to obey the mystic dictates of the sacred treaties. Bank reserves of Euros or notes and coins, and obligations of the ECB are indisputably genuine Euro-denominated NFA. The case of the US's Confederacy stamping counterfeit notes as "valued" and banks counting them as assets is somewhat similar. See p. 61 of Wray's book, although of course the problem of the European states has been underspending, (undercounterfeiting) deflation and depression, but not enough underspending, deflation and depression to satisfy the ECB overlords.

Regional debt can be so considered to the extent and for the time that your guess is accurate about whether the ECB will support it, or whether the region will come to its senses and make them Mosler bonds, or convertible into a post-Euro national currency, (without crazily overspending in the latter two cases). What a wonderful store of value, hedge against uncertainty, the mighty, sound, uncomplicated, uninflated Euro is!

If the ECB had an interest rate ceiling on its satrapies' debts, coupled with overarching control of their indebtedness (like the SGP) this could work, and would be a real, workable, but eccentric fiscal union, and any regional debt would be Euro-denominated NFA, good money. Just as if the US Treasury only spent through each state, through 50 state banks, and even more indirectly, through spending through these banks and each state financial systems' banks, which bought state bonds, along with the general public.

At present, the idea seems to be that there will be some central support, to the extent that the region tries to return to feudalism. Sometimes the enfeoffment of new lords in particularly weak (Greece) or strong but possibly rebellious regions (Italy) has been necessary. Rebellious regions may be treated to the ECB not supporting its bonds, indirectly through bank-priests. In effect a kind of sanctions regime, like that aimed at Iraq, the modern version of a siege.

Bob Roddis said...

Unforgiven:

I guess you told me. I'm shocked, yes shocked to learn that people attempted to defraud each other, that coins wear down and that governments attempted to impose exchange rates upon the populace to steal purchasing power. Who knew? Perhaps that's why the dollar was defined as a very specific weight of silver coin and that the coinage act of 1792 provided the death penalty for government officials who messed with it. The founding fathers would have executed Bernanke, which, of course, is something everyone learns in government schools. Right?

"The main effect was to endow Portugal with a reliable currency that stood firm throughout the next decades."

Anonymous said...

This article gives an interesting insight into price changes and inflation in real terms since 1900:

http://www.economist.com/node/457272

Basically, some things have become more expensive, many things have become cheaper.

Anonymous said...

"the coinage act of 1792 provided the death penalty for government officials who messed with it"

No, the coinage act of 1792 provided the death penalty for *officers and employees of the mint* (who debased or stole coins), not "government officials".

Read the act, educate yourself:

http://nesara.org/files/coinage_act_1792.pdf

Anonymous said...

Bob:

"The Constitution does not define the “dollar"...

"The constitutional “dollar” is a fixed weight of fine silver in the form of a coin"

As you say, the constitution doesn't define it, so your second sentence is really an assumption. Perhaps you would like to add those words to the constitution in retrospect?

Bob Roddis said...

Anonymous:

I have read the act. I wrote the comment off the top of my head at 3:00 a.m. I'll stand by the gist of it even though it was casually written.

If that's all you can find wrong with what I've written, I'll take that as a win.

Anonymous said...

Well Bernanke is neither an officer nor an employee of the US mint so even if the 1792 act was still in force your comment would be incorrect.

Also:

The 1792 act does not in fact define a 'dollar' as being a silver coin of specific weight.
(A 'dollar' is an abstract unit of account).

Instead, the 1792 act states that a coin having the value of a dollar (i.e. bearing the denomination '1 dollar') should contain 371 grains of pure silver.

You are confusing 'a dollar' with coins that have the value of 'a dollar'.

The 1792 act states that (US) dollar coins should be equal in value to Spanish milled dollars of the same period. However the 1792 act also states that (US) dollar coins should contain 371 grains of pure silver, whereas new Spanish dollar coins at the time cointained 377 grains of pure silver. A simple error?

Then of course we have the subsequent coinage acts which changed the definition of 'dollar coins', and supreme court rulings which recognised that there is nothing unconstitutional in non-metallic forms of money:

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=79&invol=457

John Zelnicker said...

@Tom

I was in London on August 15, 1971, and woke to the broadsheets with huge headlines that Nixon had closed the gold window and unpegged the dollar. Money exchange was chaotic for a few days and settled out short term with the pound sterling more expensive than before by about 15%.

Anonymous said...

Anyway, the more significant point, regarding current events, is that the Fed's creation of new reserves (what some erroneously describe as "printing money") to purchase government bonds (and some other financial assets) does not, in itself, "debase the dollar".

Major_Freedom said...

Mike Norman:

The dollar looks like it has gone down because it's looked at in nominal terms. People say, a new car cost $2500 in 1971 and now it costs $30,000. But when broken down in terms of the number of hours of labor required to purchase the car, it actually takes less labor hours now than in 1971. Not to mention the fact that you get much more for your work. You get an engine that starts every time regardless of the weather, antilock brakes, power steering, air conditioning, power windows, power brakes, navigation perhaps, etc, etc.

So the dollar has not really gone down. In real terms it has been quite strong.

Mike, if you're going to ask whether or not the dollar went down, then OF COURSE you have to look at it nominally.

Dollars can't be broken down into the number of labor hours required to purchase a car. The fact that the number of hours required to produce a car has decreased, and yet the dollar price of a car has increased, is the very proof that the dollar has been devalued.

The dollar's value in real terms HAS gone down. In 1971, $2500 could buy a new car. Now, $2500 cannot buy a new car. Now a new car requires $30,000. That means that cars, as against dollars, have increased in value, or, in other words, dollars, as against cars, have decreased in value.

You're fallaciously claiming that the dollar has not depreciated by talking about a completely different concept of the productivity of labor.

If the dollar were not devalued, then a higher productivity of labor in car production would have resulted in a fall in the dollar price of cars, not an increase. But the dollar was devalued, which is precisely why people need more of them to buy cars!

Tom Hickey said...

"But the dollar was devalued, which is precisely why people need more of them to buy cars!"

And they do have them. What's the problem?

Make today's wages and pay yesterday's prices. Really?

Major_Freedom said...

Tom Hickey:

And they do have them. What's the problem?

Who said there was a problem? I simply said the truth that the dollar has in fact been devalued.

At any rate, it's crude to lump individuals into the group "people", and then say "people do have them [dollars]." This is because the way new money enters the economy is not into everyone's bank balances at the same time, but rather into some people's bank balances before others.

Because of that, those who receive the new money last, experienced a reduction in their purchasing power, because while prices rose for them in the meantime, they didn't "have them" the dollars yet. Once they do get them, if they get them, they will have already lost.

The main point is that Norman is incorrect to say that because worker productivity has risen, it somehow implies that the dollar has not been devalued. It has been devalued. It has been devalued by there being more of them.

You do understand the law of marginal utility, don't you? Economics isn't all about accounting tautologies and spending=income identities and truisms.

indianist said...

I have been trying to know why the dollar rate is rising and why is the rupee value falling? When will all these get over and India will have a better economy? Please share your ideas with me if you are aware of it.

Tom Hickey said...

indianist, the basic problem with India is dysfunctional government and corruption. The country is still trying to make the transition from the British Raj, which just overlaid a colonial system on top of the traditional one, into a 21st century liberal democracy based on a free market.

In China, the government is not plagued with all the problems that India faces trying to transition to modern liberal democracy with a huge population, much of which is still living rather primitively in accordance with traditional standards, but even China is beset with having to overcome endemic corruption and venerable traditions that die hard.

Overlay capitalism on that, there there is also the issue of wealth, power and influence similar to feudal times. The richest in India now live higher than any of the ancient maharajas could have dreamed, and as far away from the people, too.

It is going to take time. On the positive side two of the most important technologies in bringing about the necessary change are national electrification and universal high standard education. On the negative side, reducing corruption and political chaos. These are key factors to watch.

The value of a currency is ultimately determined by the viability of the country's institutions and organization, social, political and economic. The rupee will strengthen as a global currency as India gets its act together. India is destined to be a great power eventually, along with China, as large populous countries with huge potential for development. This is why the multinationals are so interested in investing in their markets. As progress increases, so will investment.

Right now, it is essentially a coordination problem. It's very difficult to coordinate a large complex society that is developing quickly.

The good news for India is that the Western growth is faltering, and many people see more promising opportunities in the emerging world. India is way ahead of the game being a democracy and with educated people already speaking English.

So I think that India and China need to be viewed in terms of the big picture rather than day to day. Time and trend are on their side.