it’s important to distinguish between the effects of inflation/deflation and relative exchange rates. the us dollar has been on the decline relative to other world currencies but during the recent january rate cuts, it has been relatively stable
http://quotes.ino.com/chart/?s=NYBOT_dx
so you’re right, the us$ has less purchasing power overseas and we import some of our goods which will have an upward pressure on our domestic prices,
however, if you look at the United States as a closed system, specifically to investigate the inflation/deflation question and control for foreign exchange effects, you might have noticed that equity prices have corrected dramatically and real estate prices have come down as well, wages have stayed relatively flat. the last asset price to fall would be energy and commodity prices which are influenced by foreign exchange rates. does my dollar buy more house or more stock than it did last year? yes.
have a look at the 10 year treasury note. the yield is 3.5%. if inflation was alive and well in this country, then the real rate of return on those 10 year securities would be 0. now why would the bond market, a market who’s participants are mostly institutional investors, be willing to buy 0% yielding bonds? you may have your opinions on whether or not they are truly smart money, however when it comes to trading, i’d rather be with the big elephants, than with j6p (joe six pack). “smart” money doesn’t have to be correct because due to their size, often times their trades are a self fulfulling prophecy.
and finally, you might be thinking, where should i invest. well the multi-trillion dollar question of the day, is where is the money going? in 2000 it was tech, in 2006 it was real estate. what’s next? bonds. why?
all the gold ever mined in history has a value of $3 trillion. it is estimated that in 2005, only 20% ($600 billion) of the worlds gold was held in reserve. the gold market is simply not large enough for global equities to park themselves in.
bonds? $14 trillion market size…
http://en.wikipedia.org/wiki/Official_gold_reserves
http://en.wikipedia.org/wiki/Gold
http://en.wikipedia.org/wiki/Government_bond
2 responses so far ↓
1 messels // Feb 6, 2008 at 3:57 pm
great post, chris. i’ve been wondering if we’re entering into a period of extended deflation. that’s certainly what the picture seems to be painting.
a very real threat is that we stumble into a deflationary spiral as we saw with the great depression. hopefully we’re able to maintain consumer spending, at least somewhat. if people start to horde their money due to job-security or even the belief that “price increases won’t stick” then we’ll be in some major trouble.
the real estate boom is [obviously?] what pulled us through the last recessionary cycle, at least so far as i understand it, so there was a major reliance on home equity fueling the consumer spree of 2003-2006. as is fairly evident, that’s cooled off a lot. hopefully we won’t see national homeownership drop much below 67-68% since that would indicate a LOT of lost equity, foreclosures and general drag on the economy.
or?
2 UriShare - Deflation // Feb 8, 2008 at 8:26 am
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