Dollar bulls are walking on air
FREE email from MoneyWeek
Discover the latest profit opportunities and understand what’s really going on in the investment world with our punchy daily email. CLICK HERE
This genius investor does dizzying levels of research to uncover...Half Price Shares!
Faith in the dollar is faith in modern man. That is why we are suspicious of it. Early in the First World War, the French were urged to turn in their gold in exchange for bank notes. They would not lose “any part of their savings”, they were told. Nor would they have to “pay any more for anything they wished to buy”. The war over, France was unable to keep its commitments. But what did you expect?
More recently, we met Argentine president Carlos Menem in the 1990s. At the time, Argentina had boldly solved its inflation problem by fixing the peso to the dollar, one to one. This gave the Argentine economy a boost. Foreign investors felt they could invest safely. Lenders felt they could place money down on the pampas, collect high yields, and still get back money of the same value as the money they lent. Still, there was some doubt about whether Argentina could maintain the fixed-rate exchange policy. So, we put the question directly to the head of state: “Will the peso/dollar exchange rate hold?”, we wanted to know.
“Yes,” he said. “No” was the fact of the matter. A few years later, Argentina defaulted and the peso was allowed to fall to a third of its previous value. Now, this past weekend, Henry Paulson, told a crowd in India that the US is “strongly committed to a strong dollar”. The US Treasury Secretary neither smiled nor waited for laughter. Instead, he continued speaking, just as though he had not just told one of the biggest whoppers in history. Today, anyone who is a bull on the dollar (or on the pound or the euro, for that matter) has to be a bull on human nature… and on economics too.
Economics is merely the study of man and his money. But reported in the International Herald Tribune was the curious finding that people who had studied economics for six months scored no better on tests of basic economic principles than people who had never opened an economics book. The researchers were timid, in our opinion. A follow-up study will show that those who go on to study economics at an advanced level will actually score lower than those who never studied it at all. It is a value-subtracting discipline. The longer you study it, the less you know.
Still, this week, the whole world seemed to hold its breath, wondering what a committee of economists would say. Would the US central bank lower rates? Or raise them? Economics itself has been in a bull market for many years. Now, economists control our money and get their faces on our news magazines. But we live in a world of remarkable wonders. Improbably, even the Iraqi currency – the dinar – is going up against the US dollar. In January 2004, it took 1,480 dinars to buy a dollar. Now, Iraqis can buy them for just 1,240. We don’t know what to make of it all. So, we will draw only the most obvious conclusion: there’s no telling what nature or human nature might get up to. In the past, one did not need so much faith in human nature to stock up on dollars, pounds, francs or deutschmarks. Behind every one of them, until fairly recently, was a fixed quantity of something that man did not make; and neither could he duplicate it, destroy it or diddle with it – gold. Ultimately, everyone who held a franc or a dollar could count on exchanging it for gold, at a stated rate. Only in the case of an extreme emergency would central banks renege. And even then, the default would be partial… tentative… and shameful.
But the man who walks the street with a pocket full of paper money today is a man walking on air. A public official may tell him that his dollars are ‘strong’, but what does that mean? Against other major currencies, the dollar has lost nearly 10% of its value this year alone. Measured in oil, gold, or wheat the damage has been even greater. Meanwhile, the supply of dollars is increasing at 15% per year – five times faster than America’s output of the goods and services the dollar is supposed to buy. And the FT tells us that the world market in credit derivatives, almost entirely in dollars, increased 75% over the year to the end of June.
A dollar bull has nothing solid. He only has faith. He has to have confidence in modern economists. When the Treasury Secretary says we will have a ‘strong dollar,’ he must believe him. He must also believe that the American president will show restraint and prudence. And, most importantly, he has to think the folks at the Fed, America’s central bankers, will exercise their authority with foresight and intelligence. Do we need to say any thing more? We didn’t think so.
FREE! For all our latest advice on making profitable investments, claim your 3-week FREE trial of the MoneyWeek website and magazine now.
FREE! MoneyWeek’s daily investment email. A quick, useful and entertaining round-up of the latest investment news, sent to your inbox first thing every morning.To sign up to our “Money Morning” email for FREE, just click here.
Money Morning is the FREE daily email from MoneyWeek
– a punchy round-up of the latest investment news and profit opportunities.
DON’T MISS IT!
