Losing confidence in the USD

Since late July when Fed Governor James Bullard, the Fed's more adherent hawk, came out in favour of another round of  Quantitative Easing (QE), the market was so sure that it was going to happen at the FOMC meeting of August 10 that they dubbed it "QE 2.0". Well the meeting has come and gone and we got QE-Lite, which was a reinvestment of QE 1.0 into long term treasury bonds. This of course was spun as neutral because no new money printing was being created. Will this measure by enough, probably not. It is only a stop gap measure until the Fed goes full throttle with QE 2.0. But you have to wounder how long China and the rest of the foreign holders of treasury bonds will put up with this. This bring me to an article I recently read about gold, the USD, and the growing loss of confidence in the USD and all fiat currencies.

Looking at the dollar in the old-fashioned way

Jul 22nd 2010

WHEN the Bretton Woods system was cracking in the early 1970s the price of a troy ounce of gold, in dollar terms, was raised in two steps from $35 to $42.22. This was, in effect, a devaluation of the dollar.

The authorities then still thought it worth expressing the shift in terms of bullion, rather than against another currency like the Japanese yen or French franc. In the 1930s Franklin Roosevelt had a specific policy of devaluing the dollar against gold, pushing the price from $20.67 to $35 in the belief this would push commodity prices (and thus farm incomes) higher and reduce the burden of debt service.

Nowadays the price of gold is set by the market rather than by official diktat. When explaining shifts in the bullion market people tend to think in terms of supply and demand. Perhaps, however, they should view gold-price movements in terms of investors’ confidence in the dollar, and in paper money in general.

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