Markets expert Carl Futia has recently received an e-mail asking his opinion about the prospects for the US dollar and the US economy. Obviously, each investor and market pundit has his own opinion, but we decided to reproduce Futia’s opinion, which is interestingly bullish for the US.

Below is his response:

“There will be no hyperinflation without the Fed’s cooperation. They seem very reluctant to let the inflation rate move much above 2%. The 10 year Tips – note spread predicts 2.6% annual inflation for the next 10 years so the market has a lot of confidence in the Fed’s commitment to keep inflation low.

That said I think the Fed is much more concerned about domestic economic conditions than about the value of the dollar. But notice how they have dragged the Bank of Japan and the Swiss along in the QE compaign. The rest of Europe will soon follow or fall into the economic abyss. Since all the big powers will evntually embrace some version of QE and follow the Fed I don’t see how the dollar is going to drop much in the long run because of monetary expansion.

The US is the strongest economic power in the world. Soon it will be the biggest oil producer and is already the biggest natural gas producer. It has the  freest market system and is home to the  most innovative business entrepreneurs. And you say that there is a danger that people might prefer to trade in yuan, not dollars?

Apparently the message has not gotten through to the world’s criminal classes – who spit on payments denominated in any restricted currency like the yuan. Free traders trade in dollars or euros or yen and trade in dollars is the biggest by far in volume.

China looks strong because they are getting up to speed after being impoverished by the 1949- 1984 experiment with central planning and communist repression. Russia looked strong in the 1950′s because they were starting from a very low base, just like China today.

But if history offers any lessons it is that government controlled economies (of which China is an example even now) eventually hit a ceiling beyond which progress is no longer possible. This led to the collapse of the Soviet Union. It also happened in China starting around 1400 when the combination of the European Renaissance and Chinese imperial repression of  creative thought and action started China’s long slide into poverty from which she is only just emerging.

The doomsters always have something to worry about and this has been true as long as I have been active in markets, a period of nearly 50 years now. Experience teaches that in the long run the doomsters are always wrong and are either forgotten or become a laughing stock for sensible people. I don’t see any reason for thinking the fate of the current crop of doom predictors will be different.

I had a friend once who thought that the doomsters were all secretly financed by the Trilateral commission to scare the little guy into making stupid choices. I don’t share his cynicism but it is certainly consistent with the facts.”

Source: Carl Futia

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2 Responses to Futia on the Dollar and Inflation: “Dismiss the doom and gloom about the US economy… US doomsters are wrong”

  1. frank stein says:

    At least we do not have anybody burning Washington like the British did. We will be OK.

  2. jb says:

    Another total fool with a degree of paper. “The Fed WON’T allow hyperinflation…” No background fact, no historic documenation, just the usual liberal-educated emotional-based opinion.

    EVERY country that endlessly prints paper had their currency crash radically.

    Either wake up or stop lying to the public.

    The Harsh Reality of Indefinitely Printing Paper Dollars: 5 Failed Currencies And Why They Crashed. Moral? Out of control spending will always end in currency failure.

    Introduction

    Some of the countries that adopted the euro now find themselves in the position of being unable to independently manage their monetary policy. What is being done to establish financial stability? Essentially, new money is being pumped into Greece and Ireland via the European Central Bankand International Monetary Fund. This raises the question of what these actions portend for the long-term health of the euro. History may provide some answers.

    1. Papiermark (Germany)

    The Weimar Republic after World War I was the original poster child for failed currencies. A condition of the Treaty of Versailles required Germany to pay war reparations to the allied nations.

    When Germany failed to honor the repayments, France and Belgium occupied parts of the German industrialized areas. This pressured the German government to print money to pay salaries and the war debt, and hyperinflation set in. When the Rentenmark was introduced to replace the existing currency, the exchange rate was 1 for 1 trillion.

    2. Peso (Argentina)

    Argentina’s economy enjoyed record growth until the OPEC oil embargo in the mid-70s. Civil and political unrest followed, and budget and trade deficits threatened the onset of a severerecession. Rather than reduce spending or institute temporary borrowing to cover the shortfall, the government resorted to printing money. A military coup in 1976 brought further economic decline and more inflation as the money supply continued to expand. By 1982, GDP was in freefall and dropped 12% year over year, the worst since the Great Depression. Inflation was rampant as the money denominations kept adding zeros until the new peso was established to stabilize the currency. In the end, one new peso was equal to 100 billion of the original pesos (pre-1983).

    3. Dollar (Zimbabwe)

    Upon gaining its independence in 1980, the Zimbabwe dollar was valued about 25% higher than the U.S. dollar. However, many problems led to economic decline over the next several years. The problems were compounded by a military coup attempt that created more instability and lack of confidence in the financial system. As government spending escalated, wage and price controls were implemented that produced massive budget deficits. The printing presses started rolling and rampant inflation took hold. It reached 624% in 2004 and 1730% in 2006. A year later, inflation zoomed to 11,000% and money was denominated in increments of 100 million dollars. This was quickly replaced by a 500 million dollar bill that was equivalent to about 2.5 U.S. dollars. In 2008, the money was replaced by a new dollar that was equal to 10 billion of the old dollars.

    4. Sol (Peru)

    Originally an inviting target for foreign investment, Peru embarked on a program of increased public spending in the 1980s without a plan for dealing with the resulting debt. Investment dried up as liberalized trade policies slowed growth and inflation started to rise. In 1985, the government replaced the Sol with the Inti at an exchange rate of 1,000 to 1. The largest denomination of the new bill was 1,000 Inti note. By September 1990, monthly inflation had reached 400% and a 10 million inti note was created to deal with hyperinflated prices for goods and services. Only six years after its creation, the Inti was replaced by a new version of the Sol with a conversion rate of one billion to one.

    5. Escudo (Chile)

    Salvador Allende was elected president of Chile in 1970. An avowed Marxist and member of the Socialist Party, he nationalized industries and dramatically increased social spending to redistribute wealth to the poor. To pay for this, he adopted an expansive monetary policy that initially produced economic growth, but also fueled a rise in inflation. By the end of 1972, inflation had reached 600%. The rate had doubled to 1,200% within one year and the government defaulted on debts owed to other countries and international banks. The Allende government was overthrown and he committed suicide. In 1985 the Escudo was replaced by the new peso at a 1,000 to 1 rate.

    Lessons Learned

    When it comes to the value and stability of a currency, there is no free lunch. A nation’s currency is not exempt from the laws of supply and demand, so the more that is printed, the less it is worth. While expanding the money supply may be needed in an emergency situation, it’s very difficult to reverse this policy once the emergency has abated. As history shows, it usually takes a crisis and uncontrolled inflation before painful steps are taken to stabilize the currency and reverse the economic damage. (For related reading, check out The Taylor Rule: An Economic Model For Monetary Policy.)

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