Is it time to buy the U.S. dollar? We ask because right there in the latest issue of The Economist magazine is a quote from our own Bill Bonner. “The long run value of all paper currencies is zero,” says Bill in an article titled “Losing faith in the greenback.”
Now that public sentiment confirms the dollar’s bearish prospects, surely it must be the bottom. Surely it must be the time to buy financial stocks and load up for the long haul. We wonder if Bill is embarrassed to be quoted in a respectable financial publication.
But we aren’t going long the greenback just yet. We suspect the dollar bear market is just an epi-bear market. That is, the bear market in the dollar is one cycle amid an even larger cycle, the bear market in fiat currencies (money printed by governments and not backed by anything of tangible value.)
Government’s can print money and promise it’s worth something because they can tax their citizens. This makes a sovereign state like, say, the United States, unlikely to default. It’s just that governments-in Europe and in America-have made so many promises to pay that investors are starting to wonder if there isn’t a catch. Will the governments fulfill those promises by magically cranking out money?
If so, the inflation that results means the lender (the buyer of sovereign bonds) is paid back in a diminished currency. He gets his hundred backs back. But now it’s worth ninety in terms of purchasing power.
Paper money is entering a serious bear market. That’s bad for the U.S. dollar. It’s probably bad for the pound sterling too (there is a lot of debt in the U.K.) It’s especially bad for the euro, which has just as many fundamental problems as the dollar. It’s less bad for “commodity currencies” in New Zealand, Canada, and here in Australia.
Markets and Money