When I order books, they come in plain brown wrappers. For those of us around the half century mark in age or older, we remember that plain brown wrappers were the delivery method for Playboy and other risqué material.
My reading material is not so exciting.
In fact, my wife claims that my books arrive incognito so that no one will know how boring they are.
Last night, while I struggled to decide what to read – it was a toss-up between The History of the Federal Reserve (Volume 1, 1913-1951), The New Depression or just some light reading through the latest Economist magazine – I realized that, as usual, my wife is right.
But in my defense, I know why I read this stuff.
I’m trying to figure out not just where the U.S. and world economies are headed, but more importantly to my very own household, where the U.S. dollar is headed.
I have a bunch of pressed and printed cotton in my wallet (and bank account, although the latter takes a digital form), just like you do.
What makes it worth anything?
Do you ever take a dollar bill out of your wallet and ask yourself, “What’s so special about this?”
“What makes dollar worth more or less tomorrow?”
Those are the fuzzy questions that keep me up at night, especially when I know the answers.
I know what is wrong with the dollar. I know what’s driving the thing down.
When the Federal Reserve hits control+print and shoots out zillions more, then what I have must be worth less. When the Fed lowers capital reserve requirements to encourage credit… when the Fed lowers interest rates to encourage borrowing… these things theoretically make my money worth less.
That’s frustrating, because no matter how hard I work for my money, no matter how good of a steward I am with my capital, I cannot control these forces that take away my wealth.
But then there’s the other side of the coin: the things that are pushing the U.S. dollar higher.
Even though the Fed WANTS us all to borrow more and spend more, we aren’t budging. In fact, the three-year trend has been for U.S. consumers to shrink their credit, not expand it. At the same time, banks are sitting on more than a trillion dollars – yes, with a “t” – of excess reserves that they could lend out if only a qualified borrower would ask for a loan. This isn’t happening, at least to any great degree.
Picking the Best Looking Dog at an Ugly Mutt Contest
And finally, since nothing backs a currency, at the end of the day the U.S. dollar’s value is determined by how it is perceived compared to its peers – the euro and the yen. This is like picking the best looking dog at an ugly mutt contest. It’s not about beauty, it’s about relative beauty, and this is where the U.S. dollar shines.
We might have a central bank trying hard to destroy our purchasing power. We might have an ineffective Congress that is intent on doing nothing while Rome burns. In response to these things, we can at least say “Thank goodness we’re not in Athens or Tokyo!”
The euro is in tatters as Greece moves closer to the brink of leaving the common currency and Germans get ever angrier that they are supporting the Southern states.
The yen is near an all-time high, which is causing convulsions at the Bank of Japan. The Japanese need a weak currency to keep exports flowing out and hard currency flowing in because their own consumers are quickly moving to death’s door.
The Bank of Japan keeps announcing policies aimed at weakening the yen, which is a lot like trying to find a way to successfully commit suicide. Eventually, they’ll succeed.
So at the end of the day, I know the U.S. dollar is getting stronger… not because of anything we are doing right but because there is so much wrong in the rest of the economic world.
Which leads to the next realization that frustrates me: that is, this situation needs constant re-evaluation. That’s why the currency and equity markets lurch from one point to the next. Central bank and government policies are streamed out to the rest of us as everyone plays a game of musical chairs.
At this point, I want to be holding U.S. dollars when the music stops.
And I’ll stay close to the mailbox, waiting for my next plainly-wrapped delivery.
Ahead of the Curve with Adam O’Dell
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