tag:blogger.com,1999:blog-19727420.post3019574183373545232..comments2024-03-23T12:05:13.464-07:00Comments on Ideas: Implications of a Doomed DollarDavid Friedmanhttp://www.blogger.com/profile/06543763515095867595noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-19727420.post-67186603574838831012009-09-12T21:01:17.781-07:002009-09-12T21:01:17.781-07:00It is, perhaps, unreasonable to expect investment ...<b>It is, perhaps, unreasonable to expect investment advisers to not only understand economics but to explain it correctly to their customers.</b><br /><br />Why not? How can one really be an investment advisor unless s/he understands economics well enough to handle the macroeconomic risks? I do not think that the lack of economic education is the problem. The actual problem is the type of economic education provided by most of the Western universities. Sadly, most students learn Keynesian and monetarist theory and ignore the Austrian school entirely. As such, they are ill prepared to understand how the economy really works and are prone for the very big errors that usually wind up doing a lot of damage to portfolios. In my own case I avoided economics in university because I could never tolerate lecturers that were obviously over their heads but too arrogant to figure it out. The University of Toronto, where I studied engineering, was primarily teaching failed Keynesian ideas, which was of no interest to me whatsoever. <br /><br />Sadly, I first really learned about Mises and Hayek when I was working in China. Their ideas were used by local economists to defend economic liberty in a debate with my American and Canadian colleagues, who were arguing for more central planning and meddling by governments.VangelVhttps://www.blogger.com/profile/18253765145016548748noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-20717426872406412592009-09-10T00:25:44.779-07:002009-09-10T00:25:44.779-07:00I agree that speaking of "dollar denominated&...I agree that speaking of "dollar denominated" assets makes little sense; all assets have a denomination in dollars.<br /><br />Yet I think U.S. companies will do disproportionately badly if the dollar fails, which means you'll be better off invested in foreign assets, which I think is the gist of their advice.John T. Kennedyhttps://www.blogger.com/profile/15062305736757937808noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-6092312146251449232009-09-09T23:59:27.839-07:002009-09-09T23:59:27.839-07:00"Inflation due to too much money creation is ..."Inflation due to too much money creation is a problem if you have assets whose value is fixed in dollars, such as T-bills. But it isn't a problem for assets whose value is merely measured in dollars, such as U.S. stocks."<br /><br />Runaway inflation in the U.S. couldn't negatively impact U.S. stocks relative to foreign stocks?<br /><br />That seems implausible.John T. Kennedyhttps://www.blogger.com/profile/15062305736757937808noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-73700119386950775582009-09-09T15:46:18.552-07:002009-09-09T15:46:18.552-07:00Won't the big impact on most Americans be the ...Won't the big impact on most Americans be the price of imports?albatrossnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-62214734512679712182009-09-08T14:00:37.755-07:002009-09-08T14:00:37.755-07:00Actually the U.S. will never technically default a...Actually the U.S. will never technically default as long as the debt is denominated in dollars. That's the reason the rate for treasuries is called the risk-free rate.<br /><br />It's not because it has no risk, but because it has no default risk.<br /><br />Inflation? Well it seems pretty obvious to me that the government will inflate the debt away. That's what they did after WWII. <br /><br />-MercyMercy Vetselnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-77833846957903815062009-09-08T03:27:17.659-07:002009-09-08T03:27:17.659-07:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-81720504132037510562009-09-07T17:11:02.703-07:002009-09-07T17:11:02.703-07:00The most likely doom for the dollar is all of the ...The most likely doom for the dollar is all of the above, and none of the above, therefore specifying it in detail appropriate for normal times is pointless. When the dollar collapses, things will be abnormal.<br /><br />The analysis you ask for is appropriate for small changes in normal times, but the doom that I think most likely is people ceasing to use the federal reserve dollar at all, with crisis setting in around 2020 or so, and actual dedollarization setting in around 2025 or 2030Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-5393515638811154102009-09-07T11:45:41.143-07:002009-09-07T11:45:41.143-07:00I have been concerned about this for some time. Ho...I have been concerned about this for some time. However the firm I work for does much of it's business exporting engineering expertise, and custom designed equipment to corporations and governments in other nations. Weakness of the dollar tends to make us more competitive in price. <br /><br />My concern however is that we quote in US$, and our contracts last typically 2-4 years. One can see how if US inflation took off that could put us in a bind.montestruchttps://www.blogger.com/profile/01605211615360960860noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-69786298949261047772009-09-07T07:14:48.718-07:002009-09-07T07:14:48.718-07:00A drop in the value of the US dollar against other...A drop in the value of the US dollar against other currencies will tend to trigger inflation, though not one-to-one. I would expect that what they had in mind was indeed your treasury-selling scenario, with ensuing inflation. It makes sense that stocks would be denominated in real terms, so that they would rise with inflation, and my understanding is that the empirics are consistent with this idea with the caveat that one needs to control for a risk premium that is likely to rise when inflation does so; this may make stocks a bad hedge in the short run but a good hedge in the long run.<br /><br />I think the problem, though, is that depreciation-induced inflation will be concentrated in tradable goods. Stock in a US company selling exclusively to Americans won't help hedge inflation from depreciation; stock in a company selling to foreigners will.<br /><br />(I saw the Motley Fool article before I saw your post, and when I saw "dollar-denominated stocks" I thought, "I'm not even quite sure what that means". I suppose I buy produce in dollars, but I don't think of them as "dollar-denominated green peppers".)dWjhttps://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-50917216156921090042009-09-06T13:30:31.095-07:002009-09-06T13:30:31.095-07:00Unexpected large inflation acts as a redistributiv...Unexpected large inflation acts as a redistributive tax, reduces the long term growth of real output, increases risk aversion. The real real price of stocks is reduced via increased risk premiums and lower income. So the argument that stocks with domestic customers should be avoided have some merit.123noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-26955320524030575122009-09-06T04:36:20.494-07:002009-09-06T04:36:20.494-07:00"Deflation is good for people who HAVE money,..."Deflation is good for people who HAVE money, and for people who ARE OWED money, but very bad for people (or governments) who OWE money."<br /><br />Deflation is good for people who have money, true. It is not good for people who are owed money, because of credit risk. The one exception is government bonds, because if the government can't get the money from taxes, it can print it. Deflation is not a problem for governments which owe their own fiat money.<br /><br />Anyway, having gone and read Jeff Hummel's piece, I see that I'm arguing against a claim he didn't make. His argument isn't that an economic problem will trigger a default. Rather, he predicts that the government will choose default rather than a tax increase or benefit cuts to deal with the long term funding problems of Medicare and such. I doubt it, but it's possible.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-85736110554817699562009-09-05T22:31:05.258-07:002009-09-05T22:31:05.258-07:00I have trouble with the unqualified assertion that...I have trouble with the unqualified assertion that stock prices follow (upward) inflation. There's at least one source, http://rack1.ul.cs.cmu.edu/sinflat/, that shows them to be frequently anticorrelated. Otherwise I appreciate the discussion of inflation vs. exchange rates.<br />(I think repudiation would make it much more difficult to do normal business in the future than inflation, even though that's not at all satisfactory either.)Eric Hillhttp://stochastic.comnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-20738975892161098992009-09-05T18:10:39.936-07:002009-09-05T18:10:39.936-07:00Anonymous, I'm not sure I understand. A depre...Anonymous, I'm not sure I understand. A depression tends to lead to deflation, i.e. dollars getting more valuable relative to domestic goods and services, which means that the government suddenly owes more goods and services than it did before.<br /><br />Deflation is good for people who HAVE money, and for people who ARE OWED money, but very bad for people (or governments) who OWE money.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-91375158735258539522009-09-05T15:33:26.322-07:002009-09-05T15:33:26.322-07:00Since the government's debt is in its own fiat...Since the government's debt is in its own fiat currency, the fate of the debt and currency are closely linked. Although depressions decrease tax revenue, they are good for money, and hence good for government debt. Thus a depression isn't a trigger for default.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-35826566145666750572009-09-05T15:31:00.597-07:002009-09-05T15:31:00.597-07:00Sure it is. Around 2000 the dollar fluctuated aro...Sure it is. Around 2000 the dollar fluctuated around parity with the euro. It bottomed (so far) at almost $1.60 to the euro. Did we see anywhere near that much swing in US prices? As best I can tell prices in the US on most goods didn't change other than normal inflation.<br /><br />On the other hand, I have a small collection of ancient coins I bought, mostly around then, and the prices on those have pretty much fluctuated in line with the dollar/euro exchange rate. So some things will definitely increase in price.Skiphttps://www.blogger.com/profile/02735130166169369069noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-7033208992939768212009-09-05T14:40:56.411-07:002009-09-05T14:40:56.411-07:00Is it really possible, in a world as connected as ...Is it really possible, in a world as connected as ours, that "U.S. price level stays the same but the exchange rate between dollars and other currencies falls"? It's hard to find goods in the U.S. market that aren't made (at least in part) abroad. So a drop in the value of the dollar implies a rise in domestic prices.Anonymousnoreply@blogger.com