Oct 12 2007
The Dollar Drop Not Just a Currency Problem
UPDATE: Oops! We crossed our labels in our DJIA and S&P500 vs. Oil Charts. Those are now corrected. If those barrels per unit seemed off before, they’re now corrected! 10-14-2007
In America its very common to think of the dollar in a vacuum. You actually hear pundits dismiss the dollar drop, saying “Who cares! In America we spend dollars.”
Well, while we believe the dollar dropping vs. other currencies has some serious implications for the debt addicted U.S. economy, the dollar has been dropping not just against other currencies. Here are a few sobering charts worth considering when change our measure away from dollar terms.
Grocery prices in the 12 months ending 6-30-2007
Gold is the most perpetual currency, used by the Pharaohs, the Spanish Empire, and even the United States until FDR broke it from the dollar for U.S. citizens in 1933, and Nixon totally defaulted on the gold backing in 1972. How are we doing vs. gold?
And here’s the same vs. Oil. Not only are we dependent on oil for electricity and gasoline, oil is used in countless products — from plastics to fertilizers. Oil has not been going up in price, the dollar has been getting more and more devalued thanks to the Federal Reserve and the deliberately inflationary U.S. Banking System.
And the same for the Dow Jones Industrial Average.
What this is telling us is clear. The dollar’s massive drop since 2000 should not be viewed in a vacuum. It is real and tangible, and is an indicator that inflation is getting you in ways you may never have contemplated.
[...] We wrote recently on how inflation is much worse than many suspect, with grocery prices far exceeding CPI, and equity indexes — thought performing well in recent years — still far behind the rapid advance of hard assets like oil and gold. [...]
Interesting charts. I have a couple of questions:
Why pick 2000 as the starting year? DJ charts go back to 1902, iirc. On the other hand, the composition changes over time so that might not make much sense, either.
Correcting both charts for dollars per unit would help. That is, if the DJIA is dropping in dollar terms AND the dollar is dropping, the trends reinforce each other on the graph and create a misleading doubly-deep dip (or, in reverse, it could mask an even bigger drop when the DJIA is going up).
What do you think this means, if anything?
For example, the DJIA charts look pretty startling, but what would a plot of industrial output look like? Does the DJIA tell us anything about reality or just the industrial stock market?
Fresh food should probably be eliminated from any grocery index because the price is very seasonal and changes in cost are pretty much uncorrelated with anything because they are effected by everything (weather in Chile, price of gas in Brazil, etc…)
Since milk is produced locally, the dollar probably has very little to do with it (gas, perhaps). These days the price of corn, which is what dairy cows eat, is probably a far bigger contributer.
Thanks for the comments.
I picked 2000 since I believe it was the beginning of a new paradigm, where the global economy begins to realize the fallacy of enabling the trade of asset backed securities that largely rely on continued money supply expansion for their returns. In fact, I would argue GDP largely grown dependent upon it as well. Instead of measuring actual wealth production, its been a bastardized measure of asset inflation subsidizing redistributing wealth in the direction of specific sectors.
That’s really beside the point. The issue is that the U.S. dollar (claim on goods and services) supply has been increased at a pace far faster than the supply of that which can be claimed by said expanding dollar supply. That’s inherent to inflations. They’re backed by nothing instead of production. What I’m demonstrating in the chart is the reality that the dollar is losing purchasing power vs. certain tangible assets.
The world is starting to catch on that the U.S. has been running a deficit and instead of trading production for the rest of the world’s goods, its been trading asset backed debt representing assets that were bloated into the atmosphere price-wise due to the dollar’s expansion. Frequent readers of our site are familiar with how inflation induced expansions are rooted in something for nothing economics, and thus enable severe perversions in those economies addicted to such policy. The housing market collapse and the related mortgage backed debt implosion are classic examples of currency expansion leading to bubbles and inevitable busts. Hence, people are less willing to believe in the validity of the dollar, thus they demand more and more of them for the same quantity of goods and services, a trend I fully expect to continue until the bust is allowed to properly shake out. Certainly, with money supply expansion being the policy of choice to jump start the patient right now, it seems inevitable.
Equity indexes / markets (DJIA or otherwise) are difficult to use these days as judges for a particular sector because the money supply has severely dislocated and distorted the pricing mechanism. Hence the resulting relationships are well out of whack until the bust is allowed to run through and the market is allowed to do what it does naturally. This cannot happen so long as the price of money is being fixed by a central bank and the currency further debased by the banking system.
Seasonal distortions work themselves out, as do temporary events such as a poor crop. These smooth out over time, and given the consumer staple nature of fresh food, by all means it should be included, with the aforementioned caveats footnoted. Regardless, the dollar’s
Milk is price fixed as well, so its difficult to say what the real price should be. However, when the price goes up, it is inflationary. Period. Regional price indexes are valid, however, but not in the sense that they are currently calculated and manipulated officially as they are in official CPI.