Saturday, March 5, 2011

A Problem for Bernanke's and Krugman's Argument That Commodity Price Inflation Is Not Being Fed Caused

On a direct one-on-one exchange basis, the U.S. dollar now has the second lowest exchange value of any major currency.

Stefan Karlsson notes that the U.S. dollar was the second highest valued currency by unit among the most freely traded currencies, after only the British pound. That is, in the past, if you had any other highly traded currency, except for the pound, it would take more than one unit of that currency do buy one dollar. Now, it's the reverse. It takes more than one dollar to buy a unit of any of the other highly traded currencies, except for the Japanese yen. The other currencies have become more expensive. Or, in other words, the dollar has dropped in value against them.

Karlsson explains:
....there are now 5 major currencies with a higher [unit] value than the U.S. dollar, namely the British pound, the euro, the Swiss franc, the Canadian dollar and the Australian dollar. Only the yen has a lower [unit]value, and given the fact that its [unit]value is still more than 80 times lower, it will be a very long time, if ever, before its [unit]value surpasses that of the U.S. dollar. However, the yen has actually increased its value more than the others (except for the franc which has increased similarly), with its value being more than 4 times higher relative to the U.S. dollar compared to the early 1970s, about 3 times higher compared to the mid 1980s.
This puts a hole in the argument of apologists for Fed inflation, like Bernanke and Krugman, that the price of commodities are going up in terms of all commodities. Well, yeah, but because it is more expensive for those with dollars to acquire other currencies, the price of commodities in terms of dollars is more expensive than the price for those holding other currencies.

The one exception to this situation is British pound, since the Bank of England has been printing money more aggressively than even the U.S. Here's Karlsson, again:
...the one currency that has always had a higher value than the U.S. dollar, the British pound, has actually lost value against the U.S. dollar compared to the early 1970s and 1980s and it is the only major currency to have a lower value against the U.S. dollar compared to early 2000. That is because Mervyn King and his predecessors at the Bank of England has been just as, or even more, inflationist than Greenspan and Bernanke.
But the fact that it costs more to buy commodities, for those holding the dollar than those holding other major currencies (except for the pound),there is something else going on beyond a possible general rise in commodity prices. That something else is, of course, the Fed's increase in money supply, which Bernanke and Krugman refuse to recognize.

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