Saturday, March 21, 2009

Don't Burn Dollars! They're Worth Money!

Professional financial idiot Larry Kudlow has been burning dollars on television as part of a statement against the Fed's decision to buy up lots of non-Treasury securities. The idea is that this sort of behavior weakens the dollar, contributing to inflation. Of course, as Matt says, we're in a situation where deflation is much more of a problem than inflation. The dollar is really strong right now. Weakening it to get more money flowing around in the economy is a good idea.

To illustrate this, I've put up a bunch of charts showing how much the dollar buys you in other currencies, and how that quantity has changed over the past year. That first one is the British pound. A year ago, a dollar was worth 50 pence. Now it's closer to 70 pence. As Scotland uses the British pound, this has affected my life by causing me to buy lots of scotch when I'm in America.

The second chart shows the Euro, against which the dollar has also appreciated significantly. The third is the Australian dollar. When I went to Australia for a conference in July, everything seemed really expensive. I think I'll be going down there again in December and I look forward to buying local beers for the friendly philosophers down there when we're hanging out at pubs. The US dollar is worth 40% more than it was back then.

The strongest major currency in the world over the past year-plus has been the yen -- that's the fourth one, and the dollar has almost kept pace with it. There's kind of an interesting side note here about the "Yen carry trade". The Japanese central bank has been charging very low interest rates for a while now. Speculators would borrow Yen at 3%, then convert it into other kinds of money like the Icelandic Krona, and lend it out in places where interest rates were higher like Iceland at 15%. Sounds like a pretty neat idea, right? Well, it was until the Yen got super strong and the Krona collapsed. Then even if you got paid back on your 15% loan, you just had a bunch of worthless Krona and you couldn't pay off your Yen debt. Leverage would make this extra devastating.

The last chart is the Singapore dollar, since that's what I'm earning these days. Now, I have a vested interest in a weaker dollar at this point, because the strong dollar means my (still quite nice) salary is worth a bit less than I thought it'd be when I took this job. In any event, like anybody who lives abroad, I'm quite attuned to the strength of the dollar. And believe me, it's really strong. Having the Fed weaken it a little is no big problem. When you're burning it, you're burning real money.
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