Is the US Dollar Doomed?

by: Tim Iacono May 25, 2008    

Tim Iacono

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

I had the pleasure of listening to Dr. Ben Steil, Senior Fellow and Director of International Economics at the Council on Foreign Relations, speak at the New York Hard Assets Investment Conference about ten days ago on the subject of the U.S. Dollar, specifically, whether or not it is doomed.

They've put a transcript and recording up at the Resource Investor website that is well worth a look (note that the audio begins playing automatically.)

He didn't really answer the question posed in the the title of his speech, but it was sure interesting getting to the non-conclusion.

A lot of reporters ask me these days whether we're in the midst of a commodity bubble. In fact, next week I'm going to Washington to give a Senate testimony. Our good folks in Congress are examining whether we are in fact experiencing a commodities bubble driven by irrational speculation, and what we need to do about it.

My perspective is that the more interesting, and indeed more important, question to ask is whether we're at the end of what I would call a ‘fiat currency bubble.’ If we go back to the early 1980s, under the Volcker effect, inflation, and at least equally importantly inflation expectations, were driven out of the system through a pretty ruthless policy of very tight money, high interest rates.
...
In the 1990s, I'm sure many of you remember that central banks around the world sold off most of their gold reserves, and said, “We don't need this anymore. We don't need hard assets. We've got a hard U.S. dollar, managed by a responsible central bank. The stock pays interest. Gold doesn't pay interest. We don't need this stuff anymore.”

Now, fast-forward to today, and what do we have? Is this Federal Reserve dedicated to price stability? Well, we have a Fed Funds Rate at 2%. We've got consumer price inflation at 4%; wholesale price inflation at 7%; a broad measure of U.S. money to supply growth. M3, interestingly enough, is no longer calculated by the Federal Reserve. We rely on private estimates going at around 17%. It is not surprising that people around the world are beginning to lose faith in this fiat dollar.

So I think it's a mistake to characterize what we're seeing now as somehow a commodity's bubble. It may be in the grand historical sweep of things a return to normality; that may not be necessarily a good thing. The world of a responsible fiat dollar may very well be very desirable for all of us. But we have to ask, given the broad sweep of history, whether that's really possible.

In testimony before Congress a few days ago, Dr. Steil took much the same tack citing fundamental factors such as supply and demand along with declining inventories that were more likely responsible for recent commodity price increases.

What he probably should have said was that right-thinking people with lots of dollars now realize they might be better off trading in a goodly portion of those dollars for something that holds its value a little better.

Related Articles

This article has 32 comments:

  •  
    May 25 07:39 AM
    The USD is not doomed, just heading back down to the 5 peso value it had in 1995...

    Although high inflation kills a currency over time, it's not the short-term increase in inflation due to oil prices etc. that is the biggest problem. Rather it's because the US government runs large deficits over an extended period.

    Being a foreign investor or government holding USD is a bit like an investor with shares in a company that keeps issuing new shares in order to raise funds that are then spent unwisely. Eventually the shareholders will stop taking up the share issues, and will start off-loading their stock, causing the price to tank.
    Reply | Link to Comment
  •  
    May 25 08:27 AM
    re finances-this may be a time to rethink everything as the past may no longer be relevant. as my name implies-i dont have the answer but in this fast changing.easily connected world, run by not so perfect humans,who can figure out what happens next with the $ or anything else. the new world order of bush 1 is turning into a big mess.
    Reply | Link to Comment
  •  
    May 25 08:59 AM
    what's with the fake 4% inflation? try 10-12% and rewrite the article
    Reply | Link to Comment
  •  
    May 25 09:24 AM
    2008 the U.S. Dollar is worth about 3 cents.
    How? 1971 Gold= $35 an oz, 2008 Gold = $900 an oz +/-
    that's about 3 percent or 3 cents on the U.S. Dollar.

    That is why our $40,000 houses are now "worth" $1,333,333 dollars
    All prices reflect a U.S. in which the GD politicians have wrecked the economy and deflated the currency by over spending and providing "bread and circuses" to the rabble that keeps them in office.

    The World had been the "sucker" in this game as well as the U.S. Dollar was the only game in town, and Uncle Sam got to reset the value of the poker chips at any time and everyone had to continue using them. NOw the rest of the world has awakened to the scam and so the Euro and Chinese huang are rising as alternative global currencies to the US Dollar.

    Watch out, hyper stagflation is coming and we in the U.S. will continue to lose our sacred liberties as a result =We've already lost our affluence, and out privacy, and many of ou rights.

    Is there an answer? I'd suggest FIRE the politicians, reinstate the U.S. Constitution as the Law of the Land, forget U.S. world Hegemony and projection of power overseas, and go back to running the Republic -not a dimocracy - according to the U.S. Constitution.

    You can start by drilling for oil al thru the U.S. and off shore, and building nuclear and wind and solar and geothermal powerplants thruout the U.S. to make us energy independent within the next 5 years. Think of the jobs such a building program would create.
    Reply | Link to Comment
  •  
    May 25 09:32 AM
    PS Had we begun drilling in ANWR back in the 80's this "oil crisis" would not exist, the U.S. would not be in IRAQ, and oil would be about $40 a barrel. If we start drilling in ANWR tomorrow, then within 8 years we will bring enough oil onto the market - at the margin - to drive the price of oil back down to about $60 a barrel.

    Remember Prinstine is just another word for BARREN. There is nobody and nothing up there in ANWR. The U.S. has plenty of il locked up off shore and within our lands.

    Develop new oil fields in the U.S., develop alternative energy Wind,Solar,Nuclear,geo... Send the "tree huggers" to hell, if they object, energetically shun them, forbid them from using energy to heat and cool and light their homes, and forbid them from driving or flying, make them walk everywhere until they see the light of reason.

    IMO

    Reply | Link to Comment
  •  
    May 25 09:34 AM
    What else can you expect from a "hard money" guy? If paper money in general has had it, where do I go for my bags of gold dust, Iran?

    How does Japan & it's Yen get away with their pitiful interest rates, I'm serious, how do they get a Free Pass with rates that low Tim?
    Reply | Link to Comment
  •  
    May 25 10:08 AM
    No I was not on drugs when I wrote this article?
    Reply | Link to Comment
  •  
    May 25 11:03 AM
    No doubt the dollar is doomed. As a nation, we have borrowed ourselves into unsustainable and unrecoverable debt. Not only is the public debt out of hand, the private debt has soared into the stratosphere. The chickens are coming home to roost.

    The rise in commodities is just an early manifestation of the underlying weakness of the dollar and of our debt based financial system. The growth model of our economy, which is based upon borrowing, is flawed and in due time the house of cards, upon which this model is the foundation, will collapse.

    The don't worry-be happy attitude of our politicians and financial wizards is going to make any chance of averting the coming catastrophy impossible. It's not going to be a matter of asset preservation. It's going to be whether one can provide the essentials for life and survival.
    Reply | Link to Comment
  •  
    May 25 11:37 AM
    Petyaczar and Go US (assuming you are 2 different people), you guys really need to learn how to spell if you want people to take you seriously. Dimocracy? Stelf Bomber?
    Reply | Link to Comment
  •  
    May 25 11:50 AM
    We have let it be known that we want it all but do not want to pay taxes. So what is a crafty politician to do? He borrows heavily. This leads to the depreciation of our currency and to inflation. In time we will have difficulty finding lenders.
    The public, however, has its' wish "reduced taxes.
    Reply | Link to Comment
  •  
    May 25 12:32 PM
    So... where is the link to this Cal Tech marvel??? or is this just more hot air????
    Reply | Link to Comment
  •  
    May 25 01:55 PM
    Fiat currencies will eventually lose all of their value. It is only a question of how fast.
    Reply | Link to Comment
  •  
    May 25 02:13 PM
    The rhetorical question: "Is the dollar doomed or not?" begs the answer, yes or no and assumes that it is an important question.
    The same is true of the question "are we, in fact experiencing a commodities bubble driven by irrational speculation, and what do we need to do about it?"

    Asking the right questions is the most difficult thing. Answering the wrong questions is an irrelevant activity.

    It is true that to understand the world we have to simplify it which is to say we have to "misunderstand&qu... it. We call our "misunderstanding... our philosophies and our economic systems. They are, of course, merely approximations and sometimes grievous hallucinations.

    Marxism failed because it couldn't get outside of its simplifications and stop answering irrelevant questions.

    More important questions are: How do we convince people to:

    Save more money for future needs.
    Stop trying to get rich by gambling and speculating instead of working.
    Stop trying to get rich by breaking laws.
    Take care of their own health instead of breaking it down by smoking, being overweight and drinking too much alcohol and not exercising.
    Insist on more energy efficient transportation.
    Insist on sustainable food production.
    Have compassion for people less fortunate than they are.
    And finally, above all:
    Stop waging war on each other?

    Economics is not only about mathematical and philosophical abstractions such as efficient markets, and currency exchange rates, it is about all human behavior which is the basis for living together as social, interacting human beings.
    Reply | Link to Comment
  •  
    May 25 03:39 PM
    We also must stop finding answers to an aging population by importing tens of millions of impoverished and uneducated people from Latin America. Replenished tax base? Yeah, right, from people earning $10,000 cash per year doing stoop labor.

    If you want to know what Roman Empire looked like around the time of its fall, visit Southern California. Crumbling infrastructure, failing institutions, mish-mash of languages -- it's all here and coming to a state near you.
    Reply | Link to Comment
  •  
    May 25 04:10 PM
    As the first poster elaborated, the dollar is suffering a gradual demise from all the economic misfires currently destroying its value, the primary cause being govt policy that is destroying our country. I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?
    Reply | Link to Comment
  •  
    May 25 04:40 PM
    The site is called fullofhotair.com. The air technology is from a company called MDI. THe problem is they cannot make it light enough to hold enough compressed air to travel any meaningful distance. Its a physic thing. But plug in hybrids that is a game changer and so is a company called Konarka, plastic based solar panels. 1/10th the current production cost. They are already in limited production with the Defense Department as their largest customer.
    Reply | Link to Comment
  •  
    May 25 04:41 PM
    The site is called fullofhotair.com. The air technology is from a company called MDI. THe problem is they cannot make it light enough to hold enough compressed air to travel any meaningful distance. Its a physic thing. But plug in hybrids that is a game changer and so is a company called Konarka, plastic based solar panels. 1/10th the current production cost. They are already in limited production with the Defense Department as their largest customer.
    Reply | Link to Comment
  •  
    May 25 04:53 PM
    Hey Mallarde! You know what is wrong with your rationale? NOTHING! By God, our Congress (what a pathetic group) needs to read and re-read your commentary, because THAT is what is FUELING our problem right now!
    Reply | Link to Comment
  •  
    May 25 06:32 PM
    I vote for petyczar .Here's one who gets it .Only problem is your (and me ) are in the minority
    Reply | Link to Comment
  •  
    May 25 08:58 PM
    People – if you’re as investment savvy as you think you are you know that efficient systems require balance. We’re in this mess because we ignore this simple basic economic tenant. Only the short-sighted continue to advocate unbalanced systems – to truly fix our nation we need to balance the allocation of resources between economic activity, social parity and environmental responsibility. What good is economic wealth if are social infrastructure is being torn apart or if there is no clean air or water.

    Macho posturing is a fool’s refuge. Try growing up and working to find real solutions to our complex problems. The future of our nation and our planet requires us to stop repeating the mistakes of the past. Instead, we need an energy campaign on the same level as the “Marshall Plan” and the ‘New Deal’ that mounts an international campaign to break our oil dependency cold-turkey and deploys cleaner energy sources in it’s place. Nuclear power is going to be needed to help our economy break its oil addiction – but the high level of long term risk requires that this technology be managed in a way the prioritizes safety over profit – which excludes private industry. A quasi-public entity can be created to balance public and private investment and oversight. (The current version of nuclear energy oversight doesn’t even come close to the

    Alternative energy sources should be heavily incentivized to encourage private industry development. And the energy grid needs to be further decentralized – which can still be effectively managed thanks to the improvements in the computer sector. Also, decentralizing has the additional benefit of empowering larger segments of our society – giving more Americans more control over their own energy production.

    Breaking into your remaining savings to give an addict a little more crack doesn’t make sense. Blindly exploiting the last few natural resources like ANWR is just as foolish – because it doesn’t address the real problem.
    Reply | Link to Comment
  •  
    May 25 10:34 PM
    Petyaczar: you have absolutely no idea what you are talking about. Do some research on ANWR. Crunch some supply and demand figures.

    If you really want to drive prices down, just stick one thousand more rigs into the Gulf of Mexico. You could prices down to about 25$ in a flash. Of course, the reserves would not last long and the reservoirs would be destroyed, but, hey, cheap oil, right?

    As a final note, the USD is NOT doomed. It is not merely paper, folks. No, no, no. It is actually cloth. Yes, cloth. Given the rising costs of cotton, it will soon make more sense to stop buying clothes and simply staple a few hundred dollar bills together and wear those.

    Burn, baby, burn.
    Reply | Link to Comment
  •  
    May 25 11:01 PM
    Great Comments by all. I'm always interested in reading how Americans view their present social, financial and economic problems.
    A major problem I see is Americans inability to keep in check Special Interest groups (which have only one purpose and that is to corrupt the Federal and State legislators so that their intersts are fulfilled). For example, did you know that a number of years ago Brazil was faced with its own energy crisis and their government stood up one day in a single voice and said "We'll make every gas station in Brasil carry ethanol made from sugar cane and every car in Brasil will have the ability to operate on it and we'll do all of this in 7 years. (Basically, they accomplished it in 5)" Fast forward many years to present day USA. Ethanol in the U.S. is being produced now in tremendous quanities very inefficiently and 3 times the cost of the Brasil method (because we're using corn instead of sugar cane)(This, also, is having a great influence now on the price of other crops as farmers opt for the safety of a government-subsidized program and therefore plant fewer acres of other crops) AND WHY ARE WE USING CORN???????? Because 7 very wealthy families in U.S. have managed to Special Interest the Congress into passing protectionist laws in that sugar in US is protected from world prices and instead sells for some 3 times the world price.
    I'm not even taking into account that Congress won't demand that oil companies have their stations also provide ethanol or that car manufacturers structure car engines to run efficiently on ethanol. Today, if ethanol was made from world price sugar and available nationwide the price per gallon would be $2.00. Do you really think at those prices the US would have any economic interest in the Middle East!? Let's not even visit the question "What if 7 years ago George W. had have said "let's spend 1 trillion dollars on researching alternative fuel sources instead of spending it on some insignificant sand castle called Iraq." (Side question for my American friends: 45 years ago you spent billions of dollars and thousands of lives on a place called Vietnam and where did it get you in the end - 45 years from now will you be asking the same question about Iraq? Is not Vietnam today doing multi-huge business with the US despite what happened 45 years ago and do you honestly think that no matter who's running the show in Iraq they also will be doing business as usual with the US?
    Reply | Link to Comment
  •  
    May 25 11:01 PM
    Great Comments by all. I'm always interested in reading how Americans view their present social, financial and economic problems.
    A major problem I see is Americans inability to keep in check Special Interest groups (which have only one purpose and that is to corrupt the Federal and State legislators so that their intersts are fulfilled). For example, did you know that a number of years ago Brazil was faced with its own energy crisis and their government stood up one day in a single voice and said "We'll make every gas station in Brasil carry ethanol made from sugar cane and every car in Brasil will have the ability to operate on it and we'll do all of this in 7 years. (Basically, they accomplished it in 5)" Fast forward many years to present day USA. Ethanol in the U.S. is being produced now in tremendous quanities very inefficiently and 3 times the cost of the Brasil method (because we're using corn instead of sugar cane)(This, also, is having a great influence now on the price of other crops as farmers opt for the safety of a government-subsidized program and therefore plant fewer acres of other crops) AND WHY ARE WE USING CORN???????? Because 7 very wealthy families in U.S. have managed to Special Interest the Congress into passing protectionist laws in that sugar in US is protected from world prices and instead sells for some 3 times the world price.
    I'm not even taking into account that Congress won't demand that oil companies have their stations also provide ethanol or that car manufacturers structure car engines to run efficiently on ethanol. Today, if ethanol was made from world price sugar and available nationwide the price per gallon would be $2.00. Do you really think at those prices the US would have any economic interest in the Middle East!? Let's not even visit the question "What if 7 years ago George W. had have said "let's spend 1 trillion dollars on researching alternative fuel sources instead of spending it on some insignificant sand castle called Iraq." (Side question for my American friends: 45 years ago you spent billions of dollars and thousands of lives on a place called Vietnam and where did it get you in the end - 45 years from now will you be asking the same question about Iraq? Is not Vietnam today doing multi-huge business with the US despite what happened 45 years ago and do you honestly think that no matter who's running the show in Iraq they also will be doing business as usual with the US?
    Reply | Link to Comment
  •  
    May 25 11:20 PM
    Sorry I got a little off topic there. Back to the question of the US dollar?
    There's a new currency in play now in world. It's not the Euro or the Chinese Yuan, it's oil. Oil now trades like a currency. It is actively being traded like a currency. It has a bigger base than the European and Chinese currencies combined. Unlike other currencies, especially the U.S., you can't just print more of it and therefore everyone knows going in it's actual defined worth. Pretty neat currency - very efficient. And now for the first time you can exchange it for Goods or Services. (It goes like this for example " I buy from you 500,000 tons of wheat and pay for it with 50,000 barrels of oil). Ofcourse, you don't actually have to send them 50,000 barrels of oil just Certificates totalling 50,000 barrels - so you see I as the country or multi-national don't actually have to own the oil physically)( and I as the seller of the wheat don't have to worry that my currency is going to drop 5 % by tomorrow because the lender of last resort (US) decided to print a bunch more overnight). The U.S. currency now has some serious competetion and unlike gold it has a defined use and a defined rising and predictable demand.
    Reply | Link to Comment
  •  
    May 26 01:30 AM
    I tried to convince people not to buy SUVs and large pick up trucks a few years ago, impossible.

    I tried to convince people not to vote for Bush II, who must have cheated on every exam, they were just too stupid to listen.

    I have written many emails about illegal immigration and its costs with less than a year of stepped up inforcement. Even now Finestein (CA) added an amendment to the war funding bill to legalize 1 to 2 million more illegals. Lou Dobbs found it and the Senate got it removed before they voted.

    Stop illegal immigration, greatly slow legal immigration (expecially from Mexico), start massive investment in renewable energy and infrastructure, get out of Iraq, get the debt under control and ban lobbyists in congress. It will only happen with a massive change in our government. There are some good people there like Jim Webb we need to keep but will we find more leaders like him?

    Green, renewable power has been developed, but slowly, because of stupid energy policy. There is a point about some enviornmentalists stopping ANWR development but we needed gas to go to $4 a gallon to get anything done. We need stable but not much lower oil prices. So far we mostly have just heard BS from congress and as usual, nothing useful from the pres.

    Reply | Link to Comment
  •  
    May 26 01:53 AM
    "I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?"

    Wrong - Social security has never been balanced. It only worked when we had few retirees. And Clinton never had an actual surplus - that was an accounting scam called Rubinomics. There hasn't been an actual surplus in the country in well over a hundred years. The national debt doubled under Clinton - then tripled under Bush.
    Reply | Link to Comment
  •  
    May 26 01:53 AM
    "I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?"

    Wrong - Social security has never been balanced. It only worked when we had few retirees. And Clinton never had an actual surplus - that was an accounting scam called Rubinomics. There hasn't been an actual surplus in the country in well over a hundred years. The national debt doubled under Clinton - then tripled under Bush.
    Reply | Link to Comment
  •  
    May 26 01:53 AM
    "I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?"

    Wrong - Social security has never been balanced. It only worked when we had few retirees. And Clinton never had an actual surplus - that was an accounting scam called Rubinomics. There hasn't been an actual surplus in the country in well over a hundred years. The national debt doubled under Clinton - then tripled under Bush.
    Reply | Link to Comment
  •  
    May 26 01:53 AM
    "I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?"

    Wrong - Social security has never been balanced. It only worked when we had few retirees. And Clinton never had an actual surplus - that was an accounting scam called Rubinomics. There hasn't been an actual surplus in the country in well over a hundred years. The national debt doubled under Clinton - then tripled under Bush.
    Reply | Link to Comment
  •  
    May 26 01:53 AM
    "I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?"

    Wrong - Social security has never been balanced. It only worked when we had few retirees. And Clinton never had an actual surplus - that was an accounting scam called Rubinomics. There hasn't been an actual surplus in the country in well over a hundred years. The national debt doubled under Clinton - then tripled under Bush.
    Reply | Link to Comment
  •  
    May 26 01:53 AM
    "I remember under Clinton, the budget was balanced and social security was assured. (3 trillion surplus). In a few short years, the entire balance was reversed by a group that doesnt tax and spend?"

    Wrong - Social security has never been balanced. It only worked when we had few retirees. And Clinton never had an actual surplus - that was an accounting scam called Rubinomics. There hasn't been an actual surplus in the country in well over a hundred years. The national debt doubled under Clinton - then tripled under Bush.
    Reply | Link to Comment