The US dollar is growing stronger this year, and that has about half of the economic world in fits. Why? It isn't so much a result of what was said (that the dollar would lose value as a result of quantitative easing) but of the figurative and/or literal tone in which it was said (arrogant, hateful, and with naked contempt for opposing viewpoints.) It was a tone that doesn’t allow for backtracking, which is why, today, half the economic world is strangely silent.
The dollar rose 7.1% in Q3 against a basket of major western currencies, and it looks particularly strong vs commodities, which were supposed (by inflationists) to be a safe haven. Gold is near its $1,200 support level and West Texas Intermediate crude oil just touched $90 per barrel. There are some negative consequences, of course; there is no doubt that the strengthening of the US dollar is one of the main reasons Ford (F) will, as it announced on Wednesday, continue to lose money in Europe for the foreseeable future. Negative or positive, however, it is very much happening.
How could this be? There is such seductive simplicity to the inflationary argument: if you double the amount of money in existence, you won't have changed the actual amount of wealth available, so prices will correct and be twice as high as they once were, duh. The sentiment isn't wrong so much as incomplete. For example, it doesn't consider the difference between cash and money, nor does it consider the velocity of money. Still, it is an argument that one hears frequently from media pundits and on financial blogs, (not just in the comments sections, although there, one hears little else.) The argument all too frequently ends with a proclamation of infallibility and/or a denigration of the intelligence of all who harbor other opinions. Sometimes, a dissenter is willing to suggest that things may not be so simple. Alas, these dissents, generally delivered sotto voce, were never heard or processed.
And yes, there's Bitcoin. Bitcoin's huge rise in price in December of 2013 was fueled by a heady mix of inflationist logic and technological elitism that created a belief, in many, that those smart enough to understand Bitcoin were destined to rule over all others. It turns out, however, that understanding Bitcoin is pretty simple, compared to understanding fundamental value. Stock, for example, has some of that, and it is a good thing to have, as Bitcoin investors are learning today, to their sorrow.
Much of the inflationist rhetoric, and much of the harm done by it, might have been prevented, if only investors had read the great defense of floating currency. That unfortunately, has yet to be written, and while writing it is certainly beyond my powers, I find its non-existence puzzling. I'm pretty sure there's a Nobel Prize in store for whoever figures out how talk the inflationists down from their ledge, once and for all.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.