Rodney Johnson | Monday, October 22, 2012 >>
Years ago, I took the family to Stuttgart, Germany for vacation. One of the stops there is the Mercedes-Benz Museum. Being very German, the round building is constructed for ease of walking. Visitors take an elevator to the top of the round structure and then walk down a gently sloping path along the outside wall. On the way down, you view successive vintages of vehicles until you reach the bottom, which has the newest – and for sale – models on display. Way cool.
Another cool feature is that on the wall between floors there are pictures and trivia from the appropriate time frame. On the wall between the 1920s and 1930s is a poster illustrating the financial distress of the Weimar Republic…
After WWI, the world hated Germany and demanded war reparations, payable in hard foreign currency. The problem was that the world more or less had a trade embargo on Germany, starving it of access to hard currency. This, along with other ills, led the country to simply print currency with abandon, creating inflation that at one point reached 240 million percent.
Many people fear the hyperinflation period will repeat itself in the U.S. They point to the actions of the Federal Reserve and the debt issuance of the U.S. Treasury as triggers for this pending disaster…
If only the world were so simple!
It isn’t. And we’re not 1920s-era Germany. We are a $16 trillion-a-year superpower with a spending addiction, not a cast-out country. Hyperinflation is NOT in our near future.
Do we spend too much given our tax revenue? Of course.
Is our penchant for printing money instead of doing the hard work of fiscal reform idiotic? Yep.
Does financial repression steal from our conservative retirees? No doubt.
But are we a nation with declining trade, no international holders of our currency, that is unattractive to foreign buyers?
We also have that ace-in-the-hole of 5,113 nuclear warheads, per the Department of Defense. These facts do push the odds in our favor.
The U.S. is the largest economy on the planet and is among the richest. Even though we have done our best to repel foreign investors through Sarbanes-Oxley, the new Consumer Financial Protection Bureau, and the IRS, foreign capital still flows in.
In short, we are attractive in spite of how badly we treat others.
When we add to this the fact that our currency and our debt is widespread in the world, the chances of large holders spurning our currency is remote. The reason is that currency has to be exchanged for something else. In a world marked by a race to the bottom, where everyone wants the cheapest currency so their exports are least expensive, there is not a government in sight that wants their currency to be the “go-to” in this situation. If another currency displaces the U.S. dollar as the currency of reserve, then that currency will shoot up in value, harming exports and ruining trade balances.
As Switzerland found out in the summer of 2011, when everyone rushes into your currency it makes your exports prohibitively expensive and your assets all but untouchable to the rest of the world. That’s bad.
Then there’s the little thing of power and reach…
The conversation about economics tends to revolve around currency valuations, trade, the psychology of markets and government intervention. What people often dismiss is security. This is probably because right now world security is not in question.
No one anticipates a world war or outbreak of conflict between very large powers. And that’s because there is only one very large military power today… us. The good ol’ U.S. of A.
We exert influence in countless areas, not because of the U.S. dollar, but because of the U.S. military. The very basic question is, “Do you want to be aligned with us or against?” If you are with us, you won’t take actions that debase our currency. Leave that to the professionals at the Fed.
Our view? The dollar won’t crumble into utterly useless pieces of ink-soaked cotton just yet… hyperinflation is the gold bugs’ pipe dream. We say hoard dollars. In times like these, they’re going to gain value.
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The Swiss Franc
It’s an odd thought that a country’s economy could be punished for being strong and stable. But that was the case for Switzerland in 2011, as Rodney mentioned above.
The Swiss franc has been gaining strength against…