The Blog

The Dollar Dips

Gold glimmers.

11:00 AM, Nov 14, 2009 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

"Buy gold," we are told by no less an authority than G. Gordon Liddy. "It's value has never gone to zero," says an official once in charge of America's gold hoard, including the bars stored in Fort Knox. Why investors should find that reassuring is not obvious, but never mind. They have bid the price steadily up to and past the $1,100 per ounce mark, from around $270 at the beginning of this decade, and around $700 when the current crisis in financial markets hit the value of stocks and property. And a very rich and very shrewd investor is telling friends that he expects the current price to more than double in the next five years.

It seems that investors, or at least many of them, have decided that the Obama administration and the Bernanke Fed are combining to depreciate the dollar, the former willingly to encourage exports and create jobs, the latter warily. Talk of the devaluing of other nations' paper currencies at one time produced a flight to the dollar, deemed safe from the depredations of rulers trying to shore up their struggling economies by printing money. But times have changed. There is now so little faith in the value of the dollar, which has dropped to about a 15-month low against a basket of currencies, that investors are fleeing to Brazilian reals and Russian rubles--or so it seems.

Of course, with interest rates in America close to zero, some investors are borrowing dollars at virtually no cost, and using them to buy assets in nations in which interest rates are high enough to make such a trade profitable. The influx of these funds drives up the value of assets in other countries, creating the danger of "bubbles," which might burst if this footloose, "hot money" is suddenly withdrawn. Which has the recipient countries more than a little nervous, and Brazil has adopted a tax to discourage an inflow of dollars.

And more than a little annoyed. The flip side of the decline of the dollar is an increase in the value of other currencies relative to the dollar. Which upsets those countries, since the rise in the value of their currencies--40% in the case of Brazil's real--makes life more difficult for their exporters, and encourages consumers to buy imported goods that are cheaper in the local currency. Fewer jobs for locals. That's why Russia, Korea and Thailand ($15 billion of dollar purchases to hold down the value of the baht) are buying dollars in an attempt to bid up its value, i.e., hold down the value of their own currencies. And why they are so upset with the Chinese, who peg their yuan to the falling dollar, making their exports cheaper in comparison with Asian countries that have seen their currencies rise against the dollar. The Europeans, whose euro has risen in value some 7% against the dollar and the yuan, are also unhappy. Or at least some of them are: Germany's exports of sophisticated engineering products seem to be holding up despite the fact that they are now more expensive in America and Asia.

More important for the long run is the loss of faith in the dollar. Investors see a U.S. government awash in red ink, with budget deficits running at high levels for as far ahead as the eye can see. And they see a Federal Reserve Board chairman buying the IOUs the government is issuing, printing money to pay for these bonds and notes. Fear that a flood of new dollars will reduce their value typically produces a flight to "hard assets"--gold, silver, commodities, art--that will in the future fetch more of these depreciated dollars, offsetting the declining value of each one. Consider oil: estimates are that producers have raised the price of oil by about $20 per barrel to offset the decline in the purchasing power of the dollars they are getting for their crude, which is priced in dollars on international markets.

Investors know that when the debt being run up finally has to be paid, the U.S. government will have only three choices: reduce spending, raise taxes, or print more dollars.

Forget spending cuts: this administration has no intention of cutting spending: austerity is not high on the agenda of Pelosi & Co. Indeed, despite the already-soaring deficit, the administration and Congress remain unperturbed by the fact that their new health care entitlement program will cost $1 trillion, and not add to the deficit only if you believe that this is the first government program that will not see its cost explode over time. Throw in several billions to cover the cost of $250 checks being mailed to seniors, many hardly in the needy category, to offset the fact that stable prices have made it unnecessary to boost social security payments to keep them whole. And hold onto your wallets when the cost of the energy bill is toted up.