Saturday, May 24, 2008
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.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.
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.
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.