BLOG POST
by Felicity Blaze
Noodleman
Los Angeles, CA
12.20.13
MONEY AND INFLATION
* Special thanks to "Google Images", "wikipedia.com", "CNBC",
Patrick Barron and "BloombergBussinessweek"
How Much Longer Will the Dollar Be
the World’s Reserve Currency?
October 14, 2013
In an
English-language editorial, China’s Xinhua news agency said the world should
consider a new reserve currency “that is to be created to replace the dominant
U.S. dollar, so that the international community could permanently stay away
from the spillover of the intensifying domestic political turmoil in the United
States."
China
is the largest foreign holder of U.S. government debt, with about $1.3 trillion
of Treasury bonds in its portfolio. China is also a huge buyer of gold. Some
analysts believe China’s government is building gold reserves to create its own
gold-backed currency.
Patrick Barron is president of PMG
Consulting, LLC and has been a consultant to the banking...
http://news.heartland.org/newspaper-article/2013/10/14/how-much-longer-will-dollar-be-worlds-reserve-currency
Last week we took a look at the process involved in making
our US currency. We briefly wrote about
how money is able to affect the economy and our monetary policy. We also mentioned how counterfeiting by foreign
governments could destroy the value of our currency and harm the overall
economy. This is where we would like to
begin this week’s article on the "Noodleman Group"!
The one single person responsible for maintaining the health
of our US economy is the Chairman of The Federal Reserve. You could say he is the US economic
Tsar. He is the man who adjust all the
knobs and levers (So to speak)
economists employ to maintain the overall health of the economy. The Chairman
of the Fed., as they are sometimes called or just the Fed. for short, are
highly educated and skilled economists who know how to keep the economy running
like a well-oiled machine. If we could
compare the economy to the operation of an automobile, the Fed. is the man who
knows when to apply the gas or put on the brakes. He
keeps the economy running in the direction which is best for the country. The Fed. chairman also knows where repairs
need to be made when the economy is breaking down.
 |
Allen Greenspan
1987-2006
(Photo:wikipedia.com)
|
The Chairman of The Federal Reserve is appointed by the
President of the US and is responsible for running the economy as the President
wishes. Our most recent Chairman, Allen
Greenspan, was appointed by President Reagan and served at the Federal Reserve
from 1987 until 2006. Mr. Greenspan was
reappointed by Presidents G.H.W. Bush, Clinton and G.W. Bush which speaks very
highly of his work at the Fed. Greenspan
was skilled at navigating the US economy through both difficult and prosperous
periods until his retirement from Washington DC in 2006.
Mr. Greenspan will be our model for this discussion about
the Fed since he has a record for running the economy successfully over a
period of many years. The Chairman of
The Federal Reserve is the man who calls for more US currency to be printed or
in some cases, to be removed from circulation so the Dollar is a strong and
credible monetary system. For example;
not enough dollars is circulation and money is tight choking off economic
growth. Too many dollars however, and
money begins to become weak and creates inflation, a condition which can become
very dangerous and produce uncontrollable decay for money value if left
unchecked.
Greenspan's tenure at the Fed in many ways was highly successful guiding the country and the Dollar through recessions and prosperous and this is exactly what the Chairman's job is. He must keep his eye on our Dollars and make sure they are a credible world currency.
 |
Ben Bernanke
2006 -
(Photo:wikipedia.com)
|
Mr. Greenspan's successor at the Fed. is Ben Bernanke. Appointed by President Bush and now serving under President Obama. During Bernanke's time in office, President Obama has dispersed the "Tarp" moneys authorized by the Bush administration for the purpose of saving the economy after the collapse of the housing bubble which not only threatened the US economy but also the economies of many nations around the world. This also kept many huge US corporations from declaring bankruptcy as a result of the collapse in home prices.
Inflation is always a term we have heard in the news. We are able to see its effects on our wages
and in our home values. Inflation has
been a main component of our US economy going back to at least the days of the Civil
War. To gain a better understanding of
inflation we want to turn to Wikipedia.com:
Inflation - Related definitions
The term "inflation" originally referred to increases in
the amount of money in circulation, and some economists still use the word in
this way. However, most economists today use the term "inflation" to
refer to a rise in the price level. An increase in the money supply may be
called monetary inflation, to distinguish it from rising prices, which may also for clarity
be called 'price inflation'. Economists generally agree that in the
long run, inflation is caused by increases in the money supply.
Other economic concepts related to inflation include: deflation – a fall in the general price level; disinflation – a decrease in the rate of
inflation; hyperinflation – an out-of-control inflationary spiral; stagflation – a combination of inflation, slow
economic growth and high unemployment; and reflation – an attempt to raise the general level of
prices to counteract deflationary pressures.
Since there are many possible measures of the price level, there
are many possible measures of price inflation. Most frequently, the term
"inflation" refers to a rise in a broad price index representing the
overall price level for goods and services in the economy. The Consumer Price Index (CPI), the Personal Consumption
Expenditures Price Index (PCEPI)
and the GDP deflator are some examples of broad price indices.
However,
"inflation" may also be used to describe a rising price level within
a narrower set of assets, goods or services within the economy, such as commodities (including food, fuel, metals), tangible
assets (such as real
estate), financial assets (such as stocks, bonds), services (such as entertainment and
health care), or labor.
The Reuters-CRB Index (CCI), the Producer Price Index, and Employment Cost Index (ECI) are examples of narrow price indices used to measure
price inflation in particular sectors of the economy. Core
inflation is a measure of inflation
for a subset of consumer prices that excludes food and energy prices, which
rise and fall more than other prices in the short term. The Federal Reserve Board pays particular attention to the core inflation rate to get
a better estimate of long-term future inflation trends overall.
"wikipedia.com"
Fed
will get its inflation; here’s who will pay
CNBC
What’s good for central banks isn’t
always good for the individuals they are supposed to serve, a lesson likely to
come into view even more clearly in the days ahead.
Higher inflation that’s to come
will mean still-tough times for savers and retirees, whose money has generated
little return since the Fed took over the post-crisis economy.
http://thefinancialphysician.com/2013/09/fed-will-get-its-inflation-heres-who-will-pay/
 |
Alexander Hamilton
1789 - 1795
|
United States Economic policy has always been a “high wire flying
act” even from the countries beginning days as the founding fathers who wrote
the Constitution sought to finance their dreams and establish the United States
as a nation. Alexander Hamilton, the
first Secretary of the Treasury, and many of today’s economic policies are
still based upon Hamilton’s founding practices.
What Hamilton understood and was able to do so well, was finance US debt
by using the debt itself as an asset to trade upon. Sounds crazy right, but it worked and is
still being used today. The real
strength of the US economy is that it’s here, it’s strong, it’s growing and it
has a good forecast for the future. The
United States is able to do many things with money which no other nation has
ever been able to do and will probably never be duplicated!
So how is all of this related to our economy today? Again we have to return to the INFLATION
feature of our economy. Using WWII as a beginning
point for the last inflationary run, the economy grew and expanded until the
collapse of the housing bubble of 20007-2012.
During this period of history inflation grew at a steady and moderate
rate increasing wages and home values.
Goods and the purchasing power of the dollar kept pace with inflation
allowing people to feel a sense of satisfaction because they could see more
money coming into their pockets.
How Much Longer Will the Dollar Be the World’s Reserve
Currency?
October 14, 2013
http://news.heartland.org/newspaper-article/2013/10/14/how-much-longer-will-dollar-be-worlds-reserve-currency
Patrick Barron
Patrick Barron is president of PMG Consulting,
LLC and has been a consultant to the banking... (read full bio)
Editor’s note: China’s
official press agency in October called for ending the U.S. dollar as the
world's reserve currency.
In an English-language
editorial, China’s Xinhua news agency said the world should consider a new
reserve currency “that is to be created to replace the dominant U.S. dollar, so
that the international community could permanently stay away from the spillover
of the intensifying domestic political turmoil in the United States."
China is the largest
foreign holder of U.S. government debt, with about $1.3 trillion of Treasury
bonds in its portfolio. China is also a huge buyer of gold. Some analysts
believe China’s government is building gold reserves to create its own
gold-backed currency.
This news makes the
following commentary, posted Oct. 12 at the Mises.org Web site, especially
timely.
We use the term “reserve
currency” when referring to the common use of the dollar by other countries
when settling their international trade accounts. For example, if Canada buys
goods from China, it may pay China in U.S. dollars rather than Canadian
dollars, and vice versa. However, the foundation from which the term originated
no longer exists, and today the dollar is called a “reserve currency” simply
because foreign countries hold it in great quantity to facilitate trade.
Banker Expresses Fears of Current
Fed Policy
May 1, 2013
The first reserve currency
was the British Pound Sterling. Because the pound was “good as gold,” many
countries found it more convenient to hold pounds rather than gold itself
during the age of the gold standard. The world’s great trading nations could
hold pounds rather than gold, with the confidence that the Bank of England
would hand over the gold at a fixed exchange rate upon presentment.
Toward the end of World
War II the U.S. dollar was given this status by international treaty following
the Bretton Woods Agreement, with the promise that the Fed would not inflate
the dollar and stood ready to exchange dollars for gold at $35 per ounce.
U.S. Called to Account
Unfortunately, the Fed did
not maintain that commitment. It was called to account in the late 1960s, and
to his everlasting shame, President Richard Nixon took the United States “off
the gold standard” in September 1971. Nevertheless, the dollar was still held
by the great trading nations, because there was no other currency that could
match the dollar, despite the fact that it was “delinked” from gold.
Two characteristics make a
currency useful in international trade: One, it is issued by a large trading
nation; and, two, it holds its value vis-Ã -vis other commodities over time.
Although the dollar was
being inflated by the Fed, thus losing its value vis-Ã -vis other commodities
over time, there was no real competition. The German Deutsche mark held its
value better, but German trade was a fraction of U.S. trade, meaning holders of
marks would find less to buy in Germany than holders of dollars would find in
the United States. In addition, the United States was seen as the military
protector of all the Western nations against the communist countries for much
of the postwar period.
Other Monies Being Used
Today we are seeing the
beginnings of a change. The Fed has been inflating the dollar massively,
causing many of the world’s great trading nations to use other monies upon
occasion.
I have it on good
authority, for example, that DuPont settles many of its international accounts
in Chinese yuan and European euros. There may be other currencies that are in
demand for trade settlement by other international companies as well. In spite
of all this, one factor that has helped the dollar retain its reserve currency
demand is that the other currencies have been inflated, too. For example, Japan
has inflated the yen to a greater extent than the dollar in its foolish attempt
to revive its stagnant economy by cheapening its currency. The monetary
destruction disease is by no means limited to the United States.
The dollar is very
susceptible to losing its vaunted reserve currency position by the first major
trading country that stops inflating its currency. There is evidence China
understands what is at stake; it has increased its gold holdings and has
instituted controls to prevent gold from leaving China.
Should the world’s
second-largest economy and one of the world’s greatest trading nations tie its
currency to gold, demand for the yuan would increase and demand for the dollar
would decrease. In practical terms this means the world’s great trading nations
would reduce their holdings of dollars, and dollars held overseas would flow
back into the U.S. economy, causing prices to rise. How much would they rise?
It is hard to say, but keep in mind that there is an equal number of dollars
held outside the United States as there are inside the nation.
Yellen’s Dangerous QE
Fixation
President Obama’s imminent
appointment of career bureaucrat Janice Yellen as Chairman of the Federal
Reserve Board is evidence the U.S. policy of continuing to cheapen the dollar
via Quantitative Easing will continue. Her appointment increases the likelihood
that the demand for dollars will decline even further, raising the prospect of
much higher prices in the United States as demand by trading nations to hold
other currencies as reserves for trade settlement increases.
Perhaps only such
non-coercive pressure from a sovereign country like China can wake up the Fed
to the consequences of its actions and force it to end its Quantitative Easing
policy.
Patrick Barron
Patrick
Barron is president of PMG Consulting, LLC and has been a consultant to the
banking... (read full bio)
"http://news.heartland.org/newspaper-article/2013/10/14/how-much-longer-will-dollar-be-worlds-reserve-currency"
The
real savings from inflation for most Americans was in the value of their homes. Let’s say a home purchased in 1950 for
$10,000. Dollars and sold in 1970 for $25,000. Dollars gave its owner a healthy
$15,000. Dollars of profit. That’s good
inflation, right! Let’s now say that
that a home was purchased in 1990 for $80,000. Dollars. Because of the
collapse in home prices during 2007 this home owner sees his home equity drop
and instead of making money with the house, the loan on the home is now more
than the home is worth. Estimates for this home devaluation range between 20% to upwards of 50%. This is real bad
news. The same rate of inflation caused
two different outcomes based on the wave produced by the rise and fall of
inflation.
Now that we have written about the general features of inflation
we now need to cover another event which affects the US Dollar. They are loosely referred to as petrodollars. Because the US dollar is
the biggest buyers of the world’s oil, the dollar becomes pegged to world oil
prices. Also; many of the worlds oil producing nations prefer to be paid in US Dollars. In essence; the world is in
agreement with the concept of oil being more valuable than gold. President Nixon in 1971 removed our US
currency from the gold standard for many reasons.
Here is a Wikipedia article explaining the
history of this event along with a brief article describing “Petrodollars”. Understanding this event is probably the most important information of this article! Once we have a clear understanding of the foundation for which the United States Dollar is based upon then we are able to asses our currency a little better. It would seem dollars are based upon this simple formula: US GDP + World Oil Prices = Price of US Dollars and this is divided by the total number of Dollars in circulation!
Nixon Shock
From Wikipedia, the free encyclopedia
The Nixon
Shock was a series of economic measures taken by United
States President Richard
Nixon in 1971
including unilaterally canceling the direct convertibility of the United States dollar to gold. It helped end
the existing Bretton Woods system of international financial exchange,
ushering in the era of freely floating currencies that remains to the present
day.
Background
In 1944, the
Bretton Woods system fixed exchange rates based on the U.S. dollar, which was
redeemable for gold by the U. S. government at the price of $35 per ounce. Thus,
the United States was committed to backing every dollar overseas with gold.
Other currencies were fixed to the dollar, and the dollar was pegged to gold.
For the first
years after World War II, the Bretton Woods system worked well. With the Marshall
Plan Japan and
Europe were rebuilding from the war, and foreigners wanted dollars to spend on
American goods - cars, steel, machinery, etc. Because the U.S. owned over half
the world's official gold reserves - 574 million ounces at the end of World War
II - the system appeared secure.
However, from
1950 to 1969, as Germany and Japan recovered, the US share of the world's
economic output dropped significantly, from 35 percent to 27 percent.
Furthermore, a negative balance of payments, growing public
debt incurred by
the Vietnam
War and Great
Society programs, and monetary inflation by the Federal Reserve caused the
dollar to become increasingly overvalued in the 1960s. The drain on
US gold reserves culminated with the London
Gold Pool collapse in
March 1968.
By 1971,
America's gold stock had fallen to $10 billion, half its 1960 level. Foreign
banks held many more dollars than the U.S. held gold, leaving the U.S.
vulnerable to a run on its gold.
By 1971, the money
supply had increased
by 10%. In May 1971, West
Germany was the first
to leave the Bretton Woods system, unwilling to devalue the Deutsche
Mark in order to
prop up the dollar. In the
following three months, this move strengthened its economy. Simultaneously, the
dollar dropped 7.5% against the Deutsche Mark. Other nations
began to demand redemption of their dollars for gold. Switzerland redeemed $50
million in July. France
acquired $191 million in gold. On August 5,
1971, the United States
Congress released a
report recommending devaluation of the dollar,
in an effort to protect the dollar against "foreign price-gougers". On August 9,
1971, as the dollar dropped in value against European currencies, Switzerland
left the Bretton Woods system. The pressure
began to intensify on the United States to leave Bretton Woods.
Petrodollar
From Wikipedia, the free encyclopedia
A petrodollar
is a United States dollar earned by a country through the sale
of its petroleum (oil) to
another country. The term was
coined in 1973 by Georgetown University economics professor, Ibrahim
Oweiss, who
recognized the need for a term that could describe the dollar received by
petroleum exporting countries (OPEC) in exchange
for oil.
The term petrodollar
should not be confused with petrocurrency which refers
to the actual national currency of each petroleum exporting country.
In addition to
the United States petrodollar, a petrodollar can also refer to the Canadian
dollar in
transactions that involve the sale of Canadian oil to other
nations.
Large inflow of
petrodollar in a country often has an impact on the value of its currency. For
Canada it was shown that an increase of 10% in the price of oil increases the
Canadian dollar value versus the US dollar by 3% and vice
versa.
"wikipedia.com"
Now we turn our attention to the $TRILLION DOLLAR DEFICIT$. Many
of us may wonder why the government should print more money to pay off the
federal deficit? This could be
especially dangerous for economy! More
dollars flooding the world economy could make our currency worthless! Many of the world’s industrialized nations
prefer to be worth less than the US dollar, or another way to say this, is be
under or pegged to US Dollars. In today’s
world however; China is a new and economically powerful player and the US is not
able to predict what the Chinese will do in such an event. If the United States suddenly prints more money to deal with the deficit it could spark a world wide crises more devastating than the housing collapse of 2007-2012. A world wide depression could result.
Lets turn our attention now to what we could expect in the Fed printed more Dollars to pay down the deficit. A weaker Dollar - a Dollar worth less than the value of the currencies for the worlds other industrial nations could signal the begging for more and newer industry in the United States. More jobs. We've just painted a scenario which probably could never happen because no matter what, the other industrialized nations will always keep their currencies under the value of the US Dollar. Interesting stuff to think about!
This article is only meant to be an introduction to the subject of inflation and how it affects our economy. People devote their full attention to this subject in their duties for so many professions pertaining to and with economics. We have really only scratched the surface. As we close out this weeks article we are posting this article from "BloombergBussinessweek". This has been Felicity writing for the "Noodleman Group"!
“BloombergBussinessweek”
Volcker,
Greenspan, and Bernanke Unite for Fed's 100th Birthday
By Peter Coy December 17, 2013
Fed
Chairman Bernanke (center right) stands with former chairmen Greenspan (center
left) and Volcker (left) after a ceremony in Washington marking the centennial
of the founding of the Federal Reserve.
(Photograph by Nicholas Kamm/AFP
via Getty Images)
There were no balloons or party hats but if you’re a Fed
watcher, there was no bigger deal this week than the ceremony on Monday marking
the centennial of the Federal Reserve. The audience of roughly 80 people in the
Fed’s boardroom on Constitution Avenue in Washington was the biggest gathering
of current and former senior Fed officials in the bank’s history, according to
the master of ceremonies, Richmond Fed President Jeffrey Lacker.
The most interesting part of the afternoon ceremony, which has
been posted onYouTube (GOOG), was
what former Fed chairmen Paul Volcker (1979-1987) and Alan Greenspan
(1987-2006) and current Chairman Ben Bernanke (2006-present) had to say about
each other. Their comments were both respectful and revealing.
In 2008 Volcker had seemed to take a shot at Bernanke in a speech about
the Fed’s $29 billion emergency loan that year that paved the way for JPMorgan Chase’s(JPM) takeover of Bear Stearns.
“The Federal Reserve has judged it necessary to take actions that extend to the
very edge of its lawful and implied powers, transcending in the process certain
long-embedded central banking principles and practices,” Volcker said in a
speech to the Economic Club of New York.
Volcker, 86, made no mention of that episode on Monday, but he
seemed to toss a garland in Bernanke’s direction when he once again mentioned “strong
actions, sometimes testing the limits of its legal authority,” but this time
added that those actions by the Fed “rested on a sense of integrity—integrity
it’s achieved and maintained over the years in the sense that it was able to
act free of partisan political passions.”
Alan Greenspan, 87, making scant reference to his predecessor or
successor, focused his brief remarks on the biggest one-day collapse in stock
prices in U.S. history on Oct. 19, 1987, shortly after he took office. He said
“the days that followed that crash were truly frightening.” Interestingly,
Greenspan said that the crash itself, in which the Dow Jones industrial average
fell nearly 23 percent, “is a distant memory of no ongoing interest.” It
remains of intense interest to scholars of financial-market instability, who
fault Greenspan for putting too much faith in the self-stabilizing properties
of markets.
Bernanke, a spritely 60 in his last year on the job, spoke after
his elders, referring to them familiarly as “Paul” and “Alan.” He said he keeps
in his office a two-by-four length of wood that was mailed to Volcker as part
of a protest by builders against his tight-money inflation-fighting policies,
which depressed housing demand. He said the wood “communicates some distinctly
unfavorable views of high interest rates and their effects.” Of course, with
the federal funds rate at 0 to 0.25 percent, Bernanke is more often criticized
for keeping rates too low, not too high.
STORY: The Volcker Rule Is
Tough. It's Complicated. Will It Be Effective?
Under Bernanke’s predecessors. severe financial crises had faded
from sight. As Greenspan noted, the 1987 crash had no lasting effects. The Fed
perceived its main job as setting interest rates correctly. Bernanke observed,
though, that the Fed was born in response to the Panic of 1907. Without
mentioning Volcker or Greenspan, Bernanke said, “In response to the Panic of
2008, the Federal Reserve has returned to its roots by restoring financial
stability as a central objective alongside the traditional goals of monetary
policy.”
The birthday party was a few days early because it wasn’t until
Dec. 23, 1913, that President Woodrow Wilson signed the Federal Reserve Act.
Presumably the Fed didn’t want to wait until nearly Christmas Eve to celebrate.
“BloombergBussinessweek”
http://www.truthdig.com/cartoon/item/inflation_20130204
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