Bloomberg: weak dollar, inflation "illusory"

Apparently, the continued erosion of the US dollar's purchasing power and the ensuing inflation we've witnessed since 1975 has been merely an illusion.

So says Bloomberg in an astonishingly misleading article entitled, "Weak dollar illusory as correlated trade gains show":

"For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago. Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes.

That was four years after the Bretton Woods agreement, set up in 1944 to link currencies to the price of gold, collapsed. The U.K. pound has dropped 34 percent and the Canadian dollar has fallen 6 percent."

Using the Bloomberg Correlation-Weighted Currency Index as a value benchmark, the writer purports to show that the dollar is just "as valuable" now (more so!) as it was in the period just after Nixon "closed the gold window" and removed the last vestiges of the gold standard in 1971.

Here's an explanation of Bloomberg's weighted currency index:

"The Bloomberg Correlation-Weighted Currency Indices (BCWI) provide an indication of the relative strength or weakness of one currency against the world, i.e., a representative basket of currencies."

The problem, of course, with assigning the dollar (or any fiat currency) a value based on the measure of a basket of currencies is that these currencies are all going down (gradually, over time) together. There is no consistent reference point for measuring true value.

This is how one editorialist, named Goldrunner, explained it:

"...We introduced how the Dollar Index can only be considered a fiat pricing scheme since it cannot reflect the value of the Dollar. Value can only be determined against a constant reference point- certainly not against a basket of items that are constantly changing."

This is particularly true during a time period when most currencies are being devalued like the time period we are now entering. This is because a group of currencies that are all falling in value, if priced against each other, will leave the currency falling the least looking as if it has risen. Down is then up."

You may be interested to see how the US dollar has fared against gold in recent years.

Chart courtesy of Bloomberg.com

While the index measurement shows the dollar to be holding steady (thanks to the "down is up" bias of said index) in the chart above, gold has still handily outperformed over a five year period. In fact, the precious metal, which started the period at a price of $411 an ounce has increased to over $1050 an ounce, a gain of over 150 percent.

Gold has increased over that period, not (as some would have you believe) because of a speculative "bubble", but because it's role as an international safe haven currency and a historical store of value (purchasing power) have been rediscovered by a new generation of investors.

There is far more to today's Bloomberg article than the dollar/gold relationship and confusion over the loss of our currency's purchasing power over time (see, for example Tim Geithner's eminently fadeable opinion on the US government's AAA debt rating), but we'll have to address some of these themes in our next post.

In short, I've come to expect a bit more from Bloomberg than this. Hopefully, next time they will do their readers a real service by reporting the truth about our currency's gradual decline in purchasing power, sad as it may be. They might even look to their own data service & charts for help.

Jim Chanos: "Overheating" in China

Here's what I'm currently watching: noted short-seller and hedge fund manager, Jim Chanos gives a talk on "Overheating & Overindulgence" in China at the London School of Economics Alternative Investments Conference (see also: Bloomberg video).

We've noted here before that Chanos is hugely bearish on the Chinese economy and looking to bet against its overheated real estate and construction businesses by shorting commodities and ancillary suppliers.

In this presentation Chanos offers his thoughts on China's GDP growth, its credit excesses, and the interplay of its economic and political system. Very interesting stuff, even if Jim Rogers is skeptical over the recent findings of newly-minted China experts.

Is he right? Given my limited knowledge of the situation, I'm inclined to agree with Marc Faber (a friend of both Chanos and Rogers) who notes that Jim Chanos is "hyper smart" and willing to back his thesis, though it's uncertain how the timing of a Chinese bust will play out.

Related articles and posts:

1. Pivot Capital Report: China's Investment Boom - Finance Trends.

2. Is China Headed Towards Collapse? - Politico.

3. Marc Faber: China bubble bad for commodities - Tech Ticker.

Does real GDP growth signal recovery?

Over on Twitter this morning, The Kirk Report tweeted a link to a Wells Capital Management report that offers some upbeat news on prospects for economic recovery.

Here's an excerpt from that report entitled, "Current Real GDP Recovery Looks as Strong as 1975, 1982 Recoveries":

"Despite a strong fourth-quarter real GDP report, the debate surrounding the strength of the contemporary economic recovery lingers. Most seem to anticipate a subpar recovery similar to the last two during the early 1990s and after the dot-com meltdown in the early 2000s.

However, although the current recovery is only two quarters old, it is thus far closely tracking the strong recoveries of 1975 and 1982..."

There follows some interesting charts and data summaries which lead the authors to conclude that the current recovery, measured on real GDP growth, is much stronger than many had believed it would be.

I am happy to consider positive arguments for economic growth, but I'm also left to wonder how reliable these real GDP figures are, given the way we measure inflation statistics these days.

Tim Iacono at TMGM has a nice little chart that illustrates this relationship between real economic growth and inflation. Note how drastically the real GDP figures can change when inflation is overstated or understated.

For a more thorough discussion of why GDP figures are an unreliable and "heavily politicized" data point, please see this post on John Williams' Shadow Stats report on 4th quarter GDP.

Added notes: this blog post from the Daily Kos site offers an upbeat outlook on the GDP numbers and jobs recovery, similar to the Wells Capital report. What are your thoughts?

SIGTARP report: housing bubble 2.0?

Last night, FT came out with this report on Sig-TARP probing possible insider trading at US banks:

"Neil Barofsky, the special inspector-general overseeing the US government’s financial rescue efforts, is to probe allegations of insider trading among bank executives and their associates.

Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.

Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information..."

The article goes on to say that much of the latest SIG-TARP report focuses on government's increased role in the housing market.

"Much of Sig-Tarp’s new report is given over to an examination of the housing market and the multitude of government schemes designed to support lending and help homeowners avoid foreclosure.

“The government has done more than simply support the mortgage market,” the report said. “In many ways it has become the mortgage market with the taxpayer shouldering the risk that had once been borne by the private investor.”

Mr Barofsky added: “All of the things that were broken in the housing market and the different roles that different private players have played, some of what we recognise now . . . actually contributed to the bubble and to the ensuing crisis are really being replicated by government actors.”"

The myriad government bank lending programs have become too numerous and confusing for me. I imagine that it's very easy to lose track of all this information unless you are a writer, blogger, or news junkie particularly focused on the bank bailouts and lending programs designed to prop up US housing prices.

To catch up with some of these details, we might want to turn to Dr. Housing Bubble's blog for their new post on the "Stunning STIGTARP report" and "The Subtle Nationalization of the Banks and Housing Market". I can see some interesting data and insights leafing through this post, and will now give it a careful read.

Morality: Lessons from Benjamin Franklin

Thanks to the many interesting articles and links shared by my friends on Twitter, I've come across an interesting post on Benjamin Franklin and his life lessons on virtue and morality. I wanted to share it with you today.

Here's an excerpt from, "Lessons in Manliness: Benjamin Franklin's Pursuit of the Virtuous Life":

"Benjamin Franklin is an American legend. He single handily invented the idea of the “self-made man.” Despite being born into a poor family and only receiving two years of formal schooling, Franklin became a successful printer, scientist, musician, and author. Oh, and in his spare time he helped found a country, and then serve as its diplomat.

The key to Franklin’s success was his drive to constantly improve himself and accomplish his ambitions. In 1726, at the age of 20, Ben Franklin set his loftiest goal: the attainment of moral perfection.

In order to accomplish his goal, Franklin developed and committed himself to a personal improvement program that consisted of living 13 virtues..."

Of course, no man is perfect, and (as the authors note) Ben Franklin was no exception to this rule, even with his continuous pursuit of the virtuous life.

Still, I wonder what we can learn from Franklin's quest. How would society and business function today if more of us decided to embark on a similar quest for self-improvement?

Related articles and posts:

1. Great Lessons from Great Men - Get Rich Slowly.

Debating the "Ring of Fire"

Barry Ritholtz had some pointed comments for Bill Gross today.

In his post on Gross' "Ring of Fire" chart, depicting deficit and dept/GDP percentages for a number of economically vulnerable countries, Ritholtz noted that the US' fiscal problems were in part due to the government enacting policies (explicit backstops for the GSEs, etc.) that were suggested by Gross and his cohorts.


As Barry put it: "Essentially, Gross is complaining that (amongst other factors) the government listened to him . . .".

There was some interesting debate in the comments section about whether or not the (government backstopped) trillions in mortgage debt on GSE balance sheets should figure into an equation on US govt. debts/liabilities.

I noticed that David Merkel weighed in on this question, and that he also has a post up at Aleph Blog discussing Gross' chart and unsustainable government debts. You might want to check that out, as David is well-versed in credit markets and able to shed some additional light on the subject.

You can find Bill Gross' latest (February 2010) investment outlook, "Ring of Fire", here.

Jim Rogers on Bloomberg: stocks may fall

Jim Rogers joins Bloomberg TV for a lengthy discussion about the economy and the outlook for global stock markets and commodities.

Also up for discussion: the vote on Bernanke's 2nd term as Fed Chairman, and why the world would be better off without central banks. Go get 'em, Jim.

Hat tip to the gang at Business Insider.

Related articles and posts:

1. Ben Bernanke: man of the year? - Finance Trends.

2. Jim Rogers on CNBC, Tech Ticker - Finance Trends.