This week the respected editor of Forbes, Steve Forbes, was interviewed by
NewsMax.com, the sister site of MoneyNews.com.
Forbes warned about the over supply of money, further saying that gold is a
major barometer of this problem.
He is absolutely right.
In his interview, he put forward policies for prudent money supply,
customer-directed education, and a health and flat tax.
But it is the issue of too much money slopping around in the American economy,
that is worrisome. The monetary stimulus we have seen over the past several
years may have averted a recession, but it has also financed a massive trade
deficit and stealth inflation.
Story Continues Below
As a result, it has brought great downward pressure on the U.S. dollar.
The downward pressure on the dollar looks bad when it is compared to the major
internationally traded currencies of other countries. For instance, in the last
year, the U.S. dollar has fallen against British sterling by some 11.4 percent;
against the euro by 11.3 percent; the Swiss franc by 8.4 percent; the yen by 4.6
percent; the Australian dollar by 4.2 percent; and the Chinese yuan by 3.2
percent.
[Editor's Note:
Can Ben
Bernanke avoid the coming currency crisis?]
It should be noted that the yuan is linked in value to the U.S. dollar by what
is known as a managed or "dirty float." Many traders and politicians feel that
the yuan is now falsely undervalued against the U.S. dollar in order to ensure
increased penetration of Chinese products into the vast U.S. consumer market.
The Real Story on the Dollar
This record of the dollar's value falling against major currencies, particularly
against the euro and sterling is bad enough. However the true picture is even
worse.
In the past year, the euro has depreciated against gold by some 9.5 percent and
sterling by 9.3 percent. For a more realistic measure of the depreciation of the
U.S. dollar, these figures should be added together.
For instance, the dollar depreciation against the euro is 11.3 percent. But the
depreciation of the euro against gold of 9.5 percent should be added to this
figure to show the true, total depreciation of the U.S. dollar over the past 12
months, making it an astounding 20.8 percent plunge.
The Apparent Rate of Depreciation
That's more than double the dollar's apparent rate of depreciation against the
euro of some 9.5 percent!
In this respect, it is interesting to note that sterling has lost some 98
percent of its 1900 value in the past 106 years. That amounts to serious
"cheating" of holders of earlier dated UK government bonds.
Of course, it could be argued that some of the U.S. dollar's depreciation
against gold is due to short-term so-called "geopolitical" premiums in the gold
price. However, the recent "geopolitical spikes" in the price have now largely
eroded, leaving the current price of gold ($629) at only $33 (5.5 percent) above
its average price for the past 12 months.
Forbes feels that the only way to curb the reckless spending of even a
Republican Congress is to reinstitute a broadband dollar link to gold (the last
fixed dollar-gold link was abandoned by President Nixon in 1973).
I wholeheartedly support this flexible approach to restoring the credibility of
responsible political backing and custodianship of the U.S. dollar.
Editor's Notes:
