We have a truly splendid outbreak of spring fever in the markets and media, the infected running about in circles, yelling "Inflation! Money-printing! Dollar crashing!"
Before rounding them up, a moment for the economy: inbound data are on the weak side. First-quarter U.S. gross domestic product, expected everywhere (until March) to be in excess of 4 percent growth, maybe 5 percent, arrived at 1.8 percent.
Net of distortions, probably closer to 2.5 percent, but not going anywhere — certainly not fast enough to absorb labor or houses. Orders for durable goods did rise 1.2 percent in March, with manufacturing continuing as the one bright spot.
The Standard & Poor’s/Case-Shiller index found falling home prices in February (Again. Duh.).
The surprise of most concern is the rise in people filing new claims for unemployment insurance. At the peak of optimism last winter, weekly filings fell into the 380,000-range; last week were 429,000, the recent average above 400,000 for the first time in two months.
OK, get out the butterfly nets, soothing voices, straightjackets, and a quart of whatever works best to thin paint and/or steady your nerves …
Principles and facts sometimes quiet the disturbed: Any inflation problem will cause a jump in long-term Treasury yields. Instead, the 10-year T-note this week dipped to 3.31 percent; excepting "Tsunami Day" (March 11, "3/11"), that’s as low as any since mid-December.
Second, you cannot have an inflation problem without rising wages. If people don’t have the money to pay higher prices, they won’t buy much of the stuff that got more expensive. In next Friday’s job data, expect wages to be flat for a fifth-straight month.
Third, there is an inflation problem — several of them, full-go wage-price spirals. But not here. China, India, Brazil, Russia, even parts of Europe are all "overheating," meaning economic growth is faster than capacity. They’re all in the serious stages of inflation that everywhere previously had required a recession to stop.
"But gold, man! Don’t you see it?! Fifteen hundred bucks! Going straight up … are you blind!? Silver: $47.50. Time to melt all that crap we got at the wedding … inflation, inflation, inflation!
Better to rent "One Flew Over the Cuckoo’s Nest." There is nothing to do with these people but shoot ’em up with thorazine. At $1,545, gold is at last closing on that all-time money loser, $895, on April 25, 1980. In constant dollars that was $2,167.
Gold does not mean anything. It’s just a pretty, scarce, and emotional commodity.
Dollar principles are harder. First: the price of gold is the price of a thing; the price of a dollar is measured in other currencies, themselves relative to each other.
Therefore, any time the booby hatch begins this dollar-falling hollering, pinch yourself. Fall from what, relative to what? Beware of charts beginning at prior highs — in mathematic inevitability, they must show subsequent decline.
We have fallen vs. the yen, now 81 per U.S. dollar. Which is very good news. The yen’s strength is a self-welded prison of deflation.
We have fallen vs. the commodity exporters — Australia and Brazil — themselves overheated by China’s insatiable appetite, and deeply vulnerable to any China slowdown.
We have "fallen" vs. the euro (now valued at $1.48 in U.S. dollars), but the dollar is still stronger than the euro-top in the summer of 2008, pre-Lehman ($1.59). The dollar has had no meaningful slide vs. China’s yuan or Russia’s ruble, and has gained vs. the Swiss franc and Canadian loonie.
All of the nations whose currencies have risen recently had previously succeeded in devaluing versus us in the pit of the financial crisis — which cheapened their exports and helped them to recover. Relative processes tend to self-correct, recurrently.
Last currency principle: the primary mover is interest-rate differential. Earn more there than here, and money goes there. In Teutonic blockheadedness, the European Central Bank has begun to raise its cost of money, assuring the collapse of the "Club Med" nations.
Our cost of money is still zero, where it will remain until someone here decides to help housing. The day that Greece goes down, you won’t want to hold euros.
Some day we’ll have dollar trouble, but this day belongs to the Mad Hatter.
Notes on this chart: The dollar has gradually declined ever since World War II, as it should have, with the rest of the world gaining relative strength. The two huge runs up in value were bad things for us and the world: the early ’80s double-digit interest rates, fighting inflation, pulled cash to the dollar; and the 1997-2004 succession of Asian currency crisis, recession, and 9/11 did the same.
The weakness since 2008 traces to suicidal strength in the yen, and a zero percent Fed fighting deflation. When we finally recover and the Fed normalizes, the dollar will return to its 80-90 index value on the chart. Then we’ll see how we do versus the new world’s largest economy, China, and how it does versus us.
