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Posts Tagged ‘Currencies’

Central Bankers Are Gaslighting Us about the “Strong Dollar”

Posted by M. C. on September 21, 2022

A perfect example of how this rhetoric works comes from the Bank of Japan’s Governor Haruhiko Kuroda in July. As the yen was really starting to slide against the dollar, he opined that “This is not so much a yen weakness as a dollar strength.” Kuroda said these words after years of negative rates, and right after the BOJ had doubled down on buying up “vast quantities of bonds” to force down interest rates and borrowing costs. Kuroda’s words also came weeks after the Swiss National Bank raised interest rates for the first time in 15 years.

https://mises.org/wire/central-bankers-are-gaslighting-us-about-strong-dollar

Ryan McMaken

On February 8, the Japanese yen fell to a 24-year low against the dollar, dropping to 143 yen per dollar. Not much has changed since then with the yen hovering between 142 and 144 per dollar. In September of 2021, one only needed 109 yen to buy a dollar. 

Overall, the yen has dropped 21 percent against the dollar over the past year, yet Japan’s central bank apparently has no plans to change course. Nor should we expect it to do so.  Japan’s debt load has become so immense that any attempt to raise interest rates or otherwise tighten monetary conditions would prove extraordinarily painful.  So, it’s no surprise the BOJ is now positioned to become the world’s last central bank clinging to negative interest rates

It’s Not Just Japan

The yen is sliding the most among the world’s major currencies, but it’s not alone. Over the past year, the euro has fallen 14 percent against the dollar while the pound has fallen 13 percent. Even the Chinese yuan, which is subject to even more currency manipulation than the West’s central banks, has fallen against the dollar. 

All of this means is we’re hearing a lot about the supposedly “strong dollar,” but not in a good way. Rather, the reputedly strong dollar is being discussed in a context of how harmful it is, and how we must explore ways to make the dollar weaker as soon as politically feasible. 

Such talk must be heartily opposed, of course, as the dollar is not “too strong,” Rather, talk of the dollar’s “strength” is not really about the dollar at all. It’s about the weakness of other currencies and it’s about how other central banks have embraced monetary policy that’s even worse than that of the US’s Fed. If, say, other national governments and central banks are concerned about the dollar being too strong, those institutions are welcome to embrace policies that will strengthen their own currencies. 

Instead, we’ll hear about how the Fed must “do something” to weaken the dollar through more easy money and thus stick it to Americans who hold dollars by lessening their purchasing power.

“We Didn’t Inflate Currency X Too Much, it’s All the Dollar’s Fault”

A perfect example of how this rhetoric works comes from the Bank of Japan’s Governor Haruhiko Kuroda in July. As the yen was really starting to slide against the dollar, he opined that “This is not so much a yen weakness as a dollar strength.” Kuroda said these words after years of negative rates, and right after the BOJ had doubled down on buying up “vast quantities of bonds” to force down interest rates and borrowing costs. Kuroda’s words also came weeks after the Swiss National Bank raised interest rates for the first time in 15 years. That was just one more example of how dovish the ECB was compared to other banks, and yet, Kuroda then manages to say with a straight face that this is all about the dollar. 

This is the sort of talk we should learn to expect on the “strong dollar.” The central banks who are devaluing their currency, aren’t to blame, you see. It’s the dollar’s fault. 

Other critiques of the strong are less explicit on this last point and are more just in the business of priming the pump to convince us all that a relatively less-weak dollar is a bad thing. 

Blaming a “Strong” Dollar Rather than Weak, Inflated Currencies 

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Gold Prices Show There’s a “Big Short” Going on in Official Currencies | Mises Wire

Posted by M. C. on August 13, 2020

However, it is not only the rising gold price that indicates that the purchasing power of fiat currencies is on the decline. Basically, all other goods prices go up as well, most notably asset prices—the prices of stocks, bonds, housing, and real estate. This means that you can buy fewer and fewer stocks, bonds, and houses with a given official currency unit. From this perspective, you can rightfully conclude that a broad-based debasement is going on as far as the world’s major official fiat currencies are concerned.

https://mises.org/wire/gold-prices-show-theres-big-short-going-official-currencies?utm_source=Mises+Institute+Subscriptions&utm_campaign=43525d04f4-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-43525d04f4-228343965

On August 4, 2020, the price of gold surpassed $2,000 per ounce, currently trading around an all-time high of $2,050 per ounce. While one may say that the price of gold is on the rise, it would actually be more meaningful to say that the purchasing power of the world’s fiat currencies vis-à-vis gold is on the decline, because this is what a rising price for gold and silver in, say, US dollars, euros, Chinese renminbi, Japanese yen, or Swiss francs really stands for: The higher the price of this precious metal, the lower the exchange value of official currencies.

Gold isn’t just a good like any other. It is special: it is the “ultimate means of payment,” the “base money of civilization.” Monetary history bears this out: whenever people were free to choose their money, they went for gold. Indeed, gold has all the physical properties that make for sound money: gold is scarce, homogenous, easily transportable, divisible, mintable, durable, and, last but not least, has a relatively high value per unit of weight. Even though officially demonetized in the early 1970s, people haven’t stop appreciating gold’s “moneyish” qualities.

However, it is not only the rising gold price that indicates that the purchasing power of fiat currencies is on the decline. Basically, all other goods prices go up as well, most notably asset prices—the prices of stocks, bonds, housing, and real estate. This means that you can buy fewer and fewer stocks, bonds, and houses with a given official currency unit. From this perspective, you can rightfully conclude that a broad-based debasement is going on as far as the world’s major official fiat currencies are concerned.

Of course, this is not what most people would wish for, as they prefer to hold a kind of money that doesn’t go down in value, money that actually preserves or even increases its purchasing power over time. Actually no one who is in his right mind would wish to hold inflationary money. Unfortunately, however, central banks have been debasing their official fiat currencies over the last decades. To make things even worse, the monetary debasement is gathering speed due to the consequences of the politically dictated lockdown crisis.

Central banks around the world print up ever greater amounts of fiat currencies to make up for lost income and profits. It is against this background that the rise of goods prices in terms of official currencies can be interpreted in a meaningful way: the rise in the quantity of money will, as an economic law, cause the exchange value of the money unit to go down—either in absolute terms or in relative terms (that is by keeping money prices at a higher level when compared to a situation in which the quantity of money has not been increased).

In view of central banks‘ expansion of the quantity of fiat currency, people increasingly seek to hold assets, such as, say, stocks, housing, real estate, and commodities, that are considered to be “inflation protected.” As they exchange fiat currencies for other goods, the money prices of these goods are bid up, and higher money prices are equivalent to a decline in the purchasing power of fiat currencies. Of course, financial market traders will be among the first to react and benefit, while those less informed will get the shaft.

In a world in which central banks not only ramp up the quantity of fiat currency but also push market interest rates to zero, people get hit particularly hard. Saving in traditional instruments (bank deposits, money market funds, etc.) is made impossible. The artificially lowered interest rates also contribute to asset price inflation: the prices of stocks and real estate are driven upward. Those holding fiat currencies suffer losses as far as their purchasing power is concerned, while people who hold assets that gain in price are on the receiving end.

Unfortunately, an end to central banks’ inflationary policies is not in sight. There is the widespread and deeply entrenched belief among people that an increase in the quantity of fiat currency would make the economy richer, and that it would help overcome financial and economic crises. This is, however, a serious mistake, for all an increase in the stock of money does is make some richer at the expense of many others. And an inflation policy can cover up economic and financial problems only for so long.

Ludwig von Mises wrote:

The collapse of an inflation policy carried to its extreme—as in the United States in 1781 and in France in 1796—does not destroy the monetary system, but only the credit money or fiat money of the State that has overestimated the effectiveness of its own policy. The collapse emancipates commerce from etatism and establishes metallic money again.1

Mises’s words should help us to better understand why the appreciation of gold (and lately also silver) vis-à-vis the fiat currency universe has been underway for quite some time now.

  • 1. Ludwig von Mises, The Theory of Money and Credit, trans. J.E. Batson (1953; repr., Auburn, AL: Ludwig von Mises Institute, 2009), p. 230.
Author:

Thorsten Polleit

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

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