Wiederaenders: Should we buy gold?

Gosh, what a mess. I hardly know where to begin.

First, as some of you know, for 22 years I've earned a major portion of my income from work for Nihon Keizai Shimbun, Japan's business paper of record, equivalent to The Wall Street Journal. Japan's economy lives and dies on international currency exchange rates, so to stay current I read a lot about this stuff. I won't claim expert status, but I know more about it that your average Courier editor.

Next, two points of fact.

Tim asserts that "China is ... purposely deflating its currency." This is plain nonsense. In point of simple fact the yuan has been rising steadily against the dollar for many years, albeit more slowly than it would naturally because the Chinese government has been buying dollars like crazy. The purpose of this has indeed been to protect export values, yes. But deflation? No way. US and international pressure is what's causing the Chinese to slowly relent on their currency, and this is positive progress from our perspective. Everyone manipulates their currencies, that's the primary purpose of central banks. This stuff goes on everywhere all the time.

Tim goes on: "the world economy’s recession led Russia and China to call for a One World Currency – other than the U.S. dollar – earlier this year." Tim's conflating two different discussions. One -- which hit the news not this year but over four years ago, while the economy was still hot and oil was becoming stupidly expensive -- was not about a scary "One World Currency," as Fox News would have it, but rather the idea of denominating more international trade in one or more currencies in addition to the dollar, which would help hedge the risk of loss of value of the dollar. Our currency has been vastly overvalued for decades, in small part because of its hegemony in international trade in vital commodities like oil, but more because other countries (especially China) buy dollars to reduce their own currency values to support exports to us. The other, going back to October last year, involves China and Russia agreeing to oil trade between them denominated in rubles and yuan rather than the dollar, which is perfectly reasonable and beside the point.

It helps to understand that currency has no intrinsic value. It's like atomic structure -- it seems solid, but if you look really closely, there's almost nothing there. Currency is just a medium of exchange, and its value is always relative. Domestically we judge value by purchasing power -- how many burgers or gallons of gas it will buy. Internationally it's set relative to other currencies. These two factors rarely track together. So, with no intrinsic value, the idea that the dollar "should" have a high value is just wrong. The value you want depends on whether you're buying or selling.

Tim says, "Within the past week we have seen reports of the U.S. dollar’s value dropping." He's behind the curve by a couple of years. Against the yen, for example, the dollar has fallen by about 20% since June of '07.

That matters to me because I earn yen and spend dollars. But changes in the international value of the dollar mean almost nothing to you if you earn dollars and spend dollars. Think -- has the dollar's 'loss' of 20% of its relative value raised prices here by 20%? Of course not. It does affect the cost of imported goods, materials and resources somewhat, but bear in mind that exchange rate is only one factor in prices. No manufacturer wants to cut his own throat by allowing his prices to rise above norms in the world's largest consumer market, so exporters to the US are mostly eating the exchange losses. (What about oil!? I hear you cry. It's generally denominated in dollars, so no change!)

If anyone's been purposely deflating a currency recently, it's been the US, and that's generally a good thing. Since what goes up must eventually come down, artificial inflation of the dollar to improve international buying power caused international investors to gradually lose confidence in it, and the return to natural balance is restoring the soundness of the currency. It's also giving a little boost to what's left of our manufacturing base by making US goods cheaper internationally and foreign goods more expensive for us.

Now we get to the real nutty stuff. Tim says darkly, "Could the U.S. dollar fully collapse? I suppose so," imagining that the dollar could lose value to the point where it becomes useless, like Confederate scrip or the Iraqi dinar as the bombs were falling. Tim may suppose it, but the idea is plainly preposterous short of an asteroid strike. The US economy is huge and it has a strong (sometimes too strong) central bank. There is no risk of real military threat to us. Most important, the entire world is holding our bonds, which means both that our currency is the one they prefer when theirs seem shaky, and they have a closely vested interest in maintaining the value of that currency. Where people agree that something has value, for whatever reason, it has value.

Sure, go buy gold if you like, and make the gold dealers richer (both when you buy it and when you sell it later). But bear in mind that gold has volatile relative value just as currency does, so it carries exactly the same risks.

If you really want to maintain the value of what you own, on the other hand, invest in your community, vote against warmongers (the single most reliable cause of lost value is war), vote against oil interests, and help make sure everyone is healthy and the kids are well educated.