To: Merritt who wrote (68395 ) 9/30/1999 10:30:00 AM From: Henry Volquardsen Read Replies (1) | Respond to
Merritt,I've been under the impression that the debasement of the dollar that took place in the 70's was a result of a chain of events - OPEC raising prices - My view is that the dollar had already been weakening for decades but because of the mask of fixed exchange rates and the gold fix it was not observable. Debasement is inflation and not price action. Infaltion had been a growing problem well before OPEC. Enough of a problem that Nixon imposed wage and price controls. This inflation had already debased the dollar but it had not been reflected in currency values. OPEC was responding in part to the weakening dollar. But more importantly oil prices had been kept artificially low by Western action and this had discouraged exploration. This had increased dependence on OPEC and gave them the whip. But the important point, in my view, is the dollar had been weakening a long time prior to OPEC. OPEC was just one of the big noticeable events that occurred at the end of the cycle and was the result not the cause.because of the dollars weakness that resulted from Nixon removing the International Dollar from the gold standard in '71 I would say the removal of the dollar from the gold standard was the result of the dollar weakness not the other way around. You point out that free market gold was $150 while the fix was $35. Sounds like a pretty weak dollar to me and the gold fix had done nothing to preent it.the reason for the disparity between the peg, and the market price, was because of a lack of confidence in the dollar Exactly. The dollar was weak before it was removed from the peg.and the lack of confidence was because people/countries didn't feel the dollar could withstand the U.S. fighting a war on two fronts - 'Nam, and Johnson's War On Poverty. Disagree. Had nothing to do with a lack of confidence in fighting a war on two fronts. The market would have accepted it if we had been willing to pay for it. We were not. There was no significant tax increase and the Fed explicitly ran the printing presses to keep priming the economy so it wouild remain strong. This excessive stimulus, deficit fiancing and printing money, gave rise to the inflation which undermined the dollae. What the market did not have confidence in was our wish to fight a two front war without being willing to pay for it.If my interpretation is correct, then the removal of the International Dollar from the gold standard acted to exacerbate an already iffy situation. It is my interpretation is that it was inevitable result. In fact this is my greatest arguement against a gold standard. The gold standard did nothing to prevent the debasement of the currency. Instead it served as a mask that kept us from seeing the damage early. In a free currency environment market forces would weaken the currency much earlier and provide a check on government policies.I'm thinking that Mr. Greenspan's spamming dollars around the globe, ??? and our large trade deficit, the market likes to focus on the trade deficit, which is indeed large, but conveniently ignores the services balance which always runs in the US favor. But trade and balance of payments math is a complex and interesting subject which we have discussed on the currency thread. My short comment is that trade is self correcting. We can only run a trade deficit if foreigners are willing to invest in dollars. If they weren't the currency would fall sufficiently to cut imports, raise exports and reattract investors. In a free floating currency environment these adjustments in equilibrium are happening all the time. In a fixed currency environment adjustments would be delayed and correction would be violent and damaging (see SE Asia). Since we are not seeing dramatic currency movements we must be in equilibrium. and until they're addressed with some fiscal prudence, the dollar is vulnerable...and gold might not be such a bad haven - or maybe the euro - or maybe Swiss Francs (I don't think they'll go through with their sales). Swiss gold sales are irrelevant to the strength of the currency. And if you think the US is fiscally imprudent you should take a look at European policy. The Euro is not the deutschemark.
