Today's Opinions, Tomorrow's Reality 

While the Gettin's Good
Preparing for the Inflationary Monster

By David G. Young

Washington DC, November 17, 2009 --  

Rising asset prices and runaway government spending are bad signs for the future of the US dollar.

First the good news. The S&P 500 index is up by 19 percent since the beginning of this year1 giving a sorely needed boost to the value of stocks in Americans' retirement accounts.

Now the bad news. The value of the US dollar has been declining sharply over this same period. It's down 10 percent against the Euro since January.2 That doesn't sound so bad until you consider that the value of the Euro has also been declining relative to commodities such as gold and oil. If you measure the S&P 500 in gold terms, it has actually declined by 2 percent this year.3,4

This brings up an important reminder about economics -- all prices are relative. Many analysts have been looking at the same numbers -- the price of oil and gold in dollar terms -- and have concluded that we are in the midst of an unsustainable commodities boom. This sounds plausible, until you remember that the price of American stocks have also risen sharply over this period, and many analysts say these are unsustainable, too.

So which is it? Are we in the midst of two simultaneous unsustainable booms in commodities and stocks? Or have the world's paper currencies simply lost value?

In addition to being a much simpler explanation, the second answer is also predicted by recent events. Since the financial crisis started last year, both European and American governments have been rapidly expanding the world's money supply through low interest rates, stimulus spending, and in the case of the United States, actually printing money. Over the past year, the American dollar has declined against every currency tracked by the paper edition Economist magazine, save those of Pakistan and Argentina. And when your national currency is in the same crowd as these countries, you know it's in big trouble.

In the United States, the irresponsible behaviors that have caused the decline of the dollar show no signs of stopping. The year started off with urgent attempts to shovel trillions of dollars into the economy, all justified by the need for economic stimulus. But now that the economy has started to grow again, government spending programs are still coming out of the woodwork.

American consumers were handed free money this summer as part of the Cash for Clunkers program, and through the fall as part of the First Time Home Buyer's Tax Credit. This month, the home buyer's tax credit was extended into 2010, expanded to include the moderately rich (couples making up to $225,000 per year), and even expanded to include existing homeowners.5 Meanwhile, politicians continue moving forward on a "reform" of health care, which will do next to nothing to constrain costs, but do a great job of increasing government expenditures through subsidized coverage to the poor -- a new entitlement that promises higher spending for decades to come.

Add to this the actions of the Federal Reserve. Although Federal Reserve Chairman Ben Bernanke yesterday acknowledged concerns about the decline in the value of the dollar, he said he still plans to keep interest rates near zero for the foreseeable future.6 This makes borrowing money cheap and leads to ever more dollars flowing into the system.

To say these behaviors are unsustainable is only partly true. They are sustainable only by continuing to erode value of the American dollar. While the recession and anemic consumer demand have kept America's inflation rate at bay until now, it is only a matter of time before the inflationary monster rears its ugly head. Public and private debts will be eroded. Consumer and asset prices will rise. Americans' cash savings will lose value.

While Americans are powerless to stop the fate of the dollar, they still have time to save their own financial skins. It's time to get it while the gettin's good. Buy a new house and take the tax credit. Put all cash into something solid like stocks, commodities or property. And borrow lots and lots of money -- chances are it won't be worth nearly as much when the time comes to pay it back.

Related Web Columns:

From America to Zimbabwe, March 24, 2009


1. Google Finance, S&P 500 -- 931.80 on January 1, 1109.30 on November 27, as posted November 17, 2009

2. Ibid., United States Dollar (USD) in Euro (EUR) -- 72 cents on January 1, 67 cents on November 27, as posted November 17, 2009

3. Ibid., S&P 500

4. London Bullion Marketing Association, 2009 London Gold Fixings, November 17, 2009

5. US News and World Report, Expanded First-Time Home Buyer Tax Credit Becomes Law, November 6, 2009

6. Financial Times, Bernanke Reassures Markets on Dollar, November 16, 2009