Tuesday, September 8, 2009

The Dollar: Up Or Down?

This is going to be a quick post.

The value of any currency moves with changes in the relationship between productive capacity and currency supply. Faith plays a huge role but, for simplicity, we'll do away with faith here. Many pundits have been calling for the dollar to crash citing the large monetary expansion undertaken by the Federal Reserve in an attempt to combat the recession/depression. Simple economics: more dollars competing for the same resources equals higher prices causing the buying power of each individual dollar to fall. Simple stuff.

What most of these pundits fail to mention is the absolutely MASSIVE wealth destruction that took place last year (at least on paper). Further, they fail to mention that the private sector is de-leveraging through an increase in the savings rate. This is very important because one has to now consider that different entities in the credit markets are moving in different directions: the public sector is leveraging (effectively) while the private sector is de-leveraging.

So, to truly know which way the dollar is headed, we have to ask ourselves what is happening faster: public borrowing or private savings?

I'll provide some data in a later post but for now my observational data tells me that we are in a deflationary environment, that the savers have the day, and that (excluding faith) the dollar should head higher in the short term.

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