It’s All About the Dollar…

Like you, I have been bombarded with headlines and stories about rising gas and food prices.  On the way to work this morning I saw gas priced over $3.35 a gallon.  Wheat prices are up.  The price of rice has caused riots in parts of the world.  I have been wondering how something so drastic can happen so quickly.  Several signs point to the falling value of the dollar.

John Tamny writes on RealClearMarkets:

No doubt the dollar price of wheat, corn and soybeans has increased respectively 136, 203 and 205 percent since 2001. It seems like a lot, and in isolation would make their worries…understandable.

But what all three left out of their analysis is the dollar’s near singular role in the above. Indeed, over the same timeframe the objective benchmark that is gold is up 244 percent in dollar terms. Rather than expensive, food in real terms hasn’t kept pace with a severe dollar devaluation that has spread to currencies around the world.

When inflation outside the U.S. is considered, it’s seemingly hidden owing to the desire of currency experts to compare the interplay of paper currencies lacking any market definition. But in truth, dollar devaluations going back to 1971 have historically occurred in concert with inflationary outbreaks worldwide. And that’s what’s happened over the last several years.

Maybe we should be paying more close attention to the dollar.

Bill Steigerwald of Townhall.com recently interviewed Steve Forbes about the falling dollar.

Q: The stock market seems to fall a percent and half a day. Oil prices just set a new record. The dollar is falling. Inflation is going up. The subprime troubles don’t seem to end. What has suddenly happened to our economy?

A: What’s happened is twofold. One is the weak dollar policy of the Federal Reserve and particularly the Bush administration. I’m a Republican, but I think they have made a grievous mistake here. When you debase your currency — you print too many dollars — strange and unpleasant things happen, such as soaring commodity prices. Since 2004 oil, copper, lumber, steel — they’ve all gone up. The housing market, which was booming, went on steroids. The same thing with a lot of the hedge and equity funds. We’re paying the price for that today.

Then with the credit crisis last summer, what has made that protracted is, first of all, the people don’t know where the bad stuff is. It’s similar to getting a health warning that bags of lettuce are tainted. It may be only a small number, but nobody buys lettuce until they know where the bad stuff is. That’s what’s happening with the subprimes.

But we also have a modern version of a bank panic. Lenders are reluctant to lend, even to solvent customers. The system is frozen up. That’s why even solvent companies in the mortgage business are having a very, very tough time these days. So we have a panic and we have the unknown.

Q: In layman’s terms, why is the fall of the dollar so important?

A: Why it’s important? Every time you go to the gas pump, you’ll see why. Every time you go to the grocery store — why are those prices rising like that? You see it in the impact on the housing market. Why did lenders behave so bizarrely? Well, one of the reasons is that a lot of new players came in with the easy money and lending standards went out the window. When you have that situation with excess money — it’s the equivalent to flooding the engine of a car with too much fuel — what you also have is that businesses are investing more outside the U.S. than inside the U.S.

Q: Is it simple enough to say that the dollar is falling in value because too many have been printed up and are in circulation?

A: Too many dollars out there. Especially when the Fed prints a dollar bill these days, with all the borrowing and exotic instruments, it can multiply pretty quickly — just like rabbits. So you stop breeding the rabbits.

Makes you wonder why this is all happening, doesn’t it?