Thursday, November 29, 2012
Charles Hugh Smith
Smith discusses which factors are “pricing” the dollar, and explores what a declining reserve currency means, domestically and internationally. The Triffin Paradox explains why the domestic monetary policy of the nation that issues the reserve currency will conflict with the needs of the international community using the currency for reserves.
Up for discussion: First, the dollar’s massive decline in domestic value over the past century; GDP, earnings and the size of the population and workforce; employee compensation; corporate earnings and government spending; and federal tax receipts. Next, the three factors most often cited as setting the value of the dollar internationally: Interest rates, the monetary base and gold.
The charts say that gold has simply caught up with earnings, GDP, profits, government spending, etc. Thus, the price of gold is not consistently correlated to the monetary base, the trade-weighted dollar or interest rates. Gold appears to march to an independent drummer. This means a distinct lack of consistent correlations.
The commonly touted drivers of the dollar’s value, measured in either trade-weighted US dollars or in gold, are inconsistent; none of them correlate consistently over time.
The three metrics of interest rates, gold and the trade-weighted dollar appear to have minimal impact on productivity, profits, output, earnings or the domestic standard of living, as these three have fluctuated with no visible impact on broad measures such as GDP or earnings.
We have seen interest rates leap to 16% and fall to near zero; gold collapse, stagnate then quadruple; and the dollar gain and lose 30% of its trade-weighted value in a few years. None of these huge swings had any correlation to broad measures of domestic activity such as GDP.
Clearly, interest rates occasionally (but not always) affect the value of the trade-weighted dollar, and the monetary base occasionally (but not always) affects the price of gold, but these appear to have little correlation to productivity, earnings, etc., or to each other.
Posted by Unknown at 8:44 AM