Of Myths and Men

The dollar is a funny thing. Back in 2009 many a town crier warned of the "devaluing", "debasement" "demise" and impending implosion of the world's reserve currency. Any down day in the dollar brought out a host of commentators to challenge the integrity of Fed and Treasury officials and hype the "crashing greenback." Many shared an affinity for shiny metal.

Lately, the "strength" of the dollar has been causing some dyspepsia in the "single issue" market observation crowd. The rising fiat is "slowing the economy", "hurting exports", "causing deflation" and "complicating the Fed's exit." Over the weekend, the strong dollar even took the mantle of the "weak dollar" and was to blame for the coming "age of the Yuan as the reserve currency of the world." Clearly James Carville was wrong about the Bond Market, he would want to be re-incarnated as the Dollar because "It gets whatever it wants."

The truth is the dollar never "crashed" or was "debased" under the prior Treasury Secretary and is not escalating out of control now. The real rate differentials that have ebbed and flowed around the world, though abnormal, are not unjustified. The missed opportunity with the Asian Infrastructure Bank (well outlined in Hank Paulson's new book) will aid Renminbi openness and Eastern dollar diversification for some time.

Living, breathing currency problems, as opposed to Myths, tend to morph from debt exits and capital flight. Unlike the P.C. (Pre-Crisis) world threat of "the Chinese will sell all their bonds and destroy us," a deep stock of our obligations are now owned by US. The little grey haired lady in charge of them shows little inclination to sell. The recent rise should open a window for a robust debate on a greenback based infrastructure bank for the West. The dollar is not rising too fast and "killing" the expansion, nor did it "crash" in the crisis. Fiat moves. The ability to adjust is the hallmark of a fiat currency world. The rigidity of anchored paper and heavy metal have caused more frequent and harmful outcomes. Like George and Lennie in Of Mice and Men, currencies tend to define themselves by the reflection of another.

Leave a Reply

Your email address will not be published. Required fields are marked *