The money has been on a tear recently. Just last week, the money index moved from 107 to 108 with an inter-week high of 109. 3. The greenback also hit parity with the euro last week.
The particular dollar is near the 20-year high compared to the Euro currency and a 24-year high against the Japanese yen.
And yet we have a huge devaluing of the dollar domestically. In his podcast, Peter tries to make sense of this tale associated with two dollars.
You can see the impact of dollar strength on import-export prices.
Foreign trade prices rose 0. 7 on the month and are upward 18. 2% on the 12 months – double the consumer price index. Peter noted that import prices are a better reflection of prices paid by consumers for domestically produced goods than the 9. 1% CPI .
“ That is a real amount, unlike the CPI this is a completely contrived, made-up quantity where you have a formula which is reverse-engineered to come out with a cheaper number. ”
On the other hand, import prices are much decrease thanks to the power of the dollar. Nevertheless, even with dollar power, import prices are still up 10. 7% year-on-year.
“ It is because the dollar is so strong that import prices are just up by 10. 7% on the year. Because if the dollar wasn’t so solid, import prices would have gone up a lot more than that and that would possess spilled over into the CPI. So , but for the solid dollar, we would have much higher inflation numbers than the types we’re dealing with. ”
The situation could be the opposite overseas. Europeans and Japanese are paying a lot more for stuff they import from the US.
“ So , their weak currencies are exacerbating their inflation problem, whereas our strong currency will be mitigating our inflation problem. ”
Peter said the overall characteristics make no sense in any way. The US has the highest pumpiing in 40 years, and yet it also has the strongest dollar within 20 years. How can that become?
“ How can the dollar be so weak and yet be so strong at the very same time? ”
Once you boil it all down, inflation is the loss of a currency’s purchasing power.
“ If our own currency buys less, which means the currency is weakening. It is losing value. We need more and more dollars to buy exactly the same quantity of goods and services. ”
If the govt gave everybody $1 million, we all wouldn’t be richer within absolute terms. The limiting factor isn’t money. The federal government can print money whenever. The limiting factor is always the availability of goods and solutions.
“ If the government sends everybody a check for $1 million, but the factories don’t produce any more products than they were making before, if service providers usually are providing any additional services than they were before, what happens? Nicely, the only thing that can happen is that prices have to go up so that People in america end up buying the same quantity of goods and services. They just pay $1 million more to buy them because each dollar they have has less value. Absolutely basic supply and demand. As the supply of anything goes up, demand being equal, the cost of that thing has to fall. So , if you double or triple the supply of dollars, the value of each dollar is going to lose a commensurate amount of value. ”
That’s what’s occurring in the US. It’s not so much that prices are going up. The significance of the dollar is going straight down. There are trillions more dollars in the economy than there were a few years ago and therefore the value of every dollar is falling.
But while the dollar is losing value, it’s not been this strong in decades. It’s gaining value relative to other currencies.
“ This is the dichotomy. It’s a tale of two dollars. You have the domestic dollar that is vulnerable and losing value. And then you’ve got this international buck that is strong and is attaining value. ”
The strength of the international dollar is helping Us citizens somewhat, but the weakness locally is outstripping that worldwide strength.
Problem remains — why is the particular dollar so strong internationally when it’s so weak domestically?
During the inflationary period of the 1970s, the particular dollar got destroyed. It didn’t start rebounding until Paul Volker got serious about fighting inflation.
“ If you look at everything from a fundamental perspective, today’s inflation should be exacting an even larger toll on the value of the dollar relative to various other currencies than it was back in the 70s. Yet, the opposite is happening. Inflation is actually turning into the boon for the dollar. The weaker the dollar is in America, the stronger it is overseas. ”
Why is that? Exactly where is all the demand for dollars coming from? Foreigners avoid need dollars to buy ALL OF US products. The US is managing a massive trade deficit.
The demand is usually coming from speculators.
“ Right now, the particular dollar is acting as an inflation hedge for everybody outside of the United States. It’s not an inflation hedge inside the United States. Weight loss buy the dollar to hedge inflation if you’re an American living in the US because there’s no hedge. The dollar is losing value. … That’s not the dynamic that Europeans are looking at, or the Japanese. From their perspective, yields in the US are very positive because they’re looking at the appreciation of the US money. ”
Keep in mind that inflation is a worldwide problem. All of the world’s central banks have expanded their own money supply. For people outside of the US, the dollar seems like a solution to that problem. As the old saying goes, it’s the cleanest dirty shirt in the hamper.
Ther is also a self-perpetuating powerful in play. As foreign people buy the dollar to hedge their currency’s inflation, the dollar goes up, reinforcing the idea that it’s an inflation hedge. That suckers in more purchasing.
But Philip said none of this fundamentally makes sense.
“ The dollar is usually rising on the greater fool theory. Why are people purchasing dollars? Not because they need them to buy American products. They’re buying them simply because they think some greater fool is going to pay a higher price for their dollars in the future. … That can go on for just so long until ultimately the particular bubble pops. And that is what is going to happen to this dollar bubble. Because that’s what it is. It’s a massive reinforcing bubble where people are buying the dollar since it’s going up. And because it’s actual going up, people buy this. ”
At some point, people will start selling dollars to get their own foreign currencies back. Then what?
Peter said this is the primary reason the world genuinely rushing to precious metal . Right now, the money looks like a much better alternative to gold.
“ Right now, the dollar is definitely stealing gold’s luster. For some time, it was bitcoin that everybody needed instead of gold. But now it’s the dollar that everybody wants instead of gold. Eventually, people are likely to figure out that they don’t would like the dollar just like a great deal of them figured out they don’t wish bitcoin. There is ultimately going to be a rush into gold. As I’ve been saying, gold will be the last safe destination standing because it’s the just true safe haven. ”
On this podcast, Peter also discusses the fact inflation is not due to “ expectations, ” the politics of inflation, and he explains why investors sheltering in dollars abroad have been in for a rude awakening.