The United States emits paper dollars. The dollar has no intrinsic value. Its issuer guarantees nothing. It is merely a piece of paper – a Federal Reserve Note. Present it to the Federal Reserve Bank, if you want. All you will get is another one just like it, nothing more. Still, foreigners are happy to take them in exchange for goods and service; Americans are happy to spend them. Everyone is happy. But quantity and quality vary inversely, at least in matters of international currency exchange. The more dollars out and about in the world, the less ultimate purchasing power each one has.
But here is the unique twist that makes the story of global finance, circa 2007, such a blockbuster: Many, if not most, nations earn their dollars by selling things to Americans. A falling dollar, meaning a rising local currency, puts the selling economy at a disadvantage compared to other U.S. suppliers. So, the local central bank prints up local currencies to buy the dollars – to help drive the dollar up and drive their local paper down. The weaker the dollar gets… the more local currency they need to print to help boost it up.
Result #1: Money, money, money… trillions of different kinds of it, everywhere… all the colors of the rainbow… in as many languages as Babel… and national heroes, emblems, bridges, church windows… you name it.
Result #2: Inflation in asset prices. Stocks in China have almost doubled so far this year. Andy Warhol’s handiwork is selling for millions. Prestigious houses soar.
“I don’t see how you can go wrong buying the best houses in England,” says a friend of ours, who has just bought a place in Cornwall. “Rich people from all over the world are coming in. They buy at the top end. And at the top end there just is not an unlimited supply. There’s only so much coastline, for example. It stands to reason that it will become more valuable.”
But it is Result #3 that interests us now. A speculative, inflation-based asset bubble should be followed by a correction… a crash… a contraction… a slump… a vaguely punk feeling… at least a little bad hair day… but maybe even a depression! When? Where? How? We don’t know.
But that’s what makes it so interesting…
Markets and Money