I noted the part of the analysis I saw was from a post made by Rolfe Winkler and Williams' full report was by subscription only. I argued that I understood Williams' argument but that I thought there might be a short-period of deflation because of the halt in money supply growth. Following the post, AustrianInvestor.com left a comment which fills in more of Williams' thinking:
John takes note of the slowdown in broad money supply (as you have many times here) and calls for a significant contraction in the first half of 2010.I would further note that I have also recognized the dollar overhang. For example, in early October I wrote:
He goes on to say
"In theory, though, slowing or outright contraction in broad money supply growth should be reflected in slower inflation or outright deflation. As with most economic theories, however, there often are simplifying assumptions that may not be appropriate under certain circumstances. Money supply, for example, works best as a predictor of inflation in a closed system, as was seen in Zimbabwe."
He goes on to say...
"In the case of the United States, however, significant dollars are held outside the country, where shifting dynamics may have significant impact on U.S. inflation."
He basically says that this supply of offshore dollars is creating a significant supply overhang that can seriously offset the contracting money supply.
...because of the large international dollar overhang. dollar weakness can occur almost anytime simply when there is panic by those holding dollars overseas.Thus, my view of the present state of the economy is probably even closer than I realized from the original snippet I saw from Williams' report.
I think our only difference now is as to what causes enough of a dollar panic to impact price inflation and a death spiral of the dollar. I would argue that the dollar panic has not hit that point yet. Perhaps Williams thinks we are closer.
I recently referenced a Goldman Sachs analysis that does seem to indicate there is some international hedging of U.S stock market positions. This could certainly explain current dollar weakness, and is a minor league form of panic. I would say more international "worry" versus "panic attack".
I further note that this hedging is tied to current stock market positions and, as I fully expect the stock market to decline in the not too distant future, this will result in an unwinding of these dollar hedges (See my comment on Goldman's report for an explanation for why the positions will be unwound).
Thus, on a short term basis my view is slightly different from that of Williams' and moves much more in sync with him the further we get out.
For me the current dollar hedging won't be enough to maintain weakness in the dollar, and indeed is likely to reverse. Perhaps for Williams' the dollar overhang is much more of a current threat and that is why he is not emphasising the short-term deflationary implications of the Fed not printing money.
I think the extremely pessimistic dollar bears often times miss one important point when predicting death spirals of the USD and Zimbabwe-type inflation. Recall Rothbard's History of Money and Banking in the United States when he discusses the post-WWI monetary system created by the US and British Empire where all countries in the world were "convinced" to hold their gold reserves in HM Treasury and/or Fort Knox (i.e. the gold exchange standard). This was so that in times of economic crisis, the central banks of the world would be forced to buy USD and GBP - and not gold. Of course after WWII the British Empire collapsed and now were are left with the defacto USD standard worldwide.
ReplyDeleteThe long-term trend of the USD is definitely down, but in times of real honest-to-goodness panic the USD has the potential to rally tremendously (see 2008). That is because in a crisis, central banks have to buy the asset that underpins their currency, which for 65%+ of the world is US Dollars.
I think that many people (not EPJ though) underestimate this fact.