[quote=peterb]The senior currency usually is the strongest in times of global stress. For a host of reasons. I would not look for the US$ to be weak in the future. All currencies are now fiat. The US$ should rise in relative strength to all other fiats in the next leg down. It’s an ugly contest. Gold may test its Oct lows, but then return to its high soon thereafter.[/quote]
peterb, all fiat currencies are the toys of the political system. That means they reflect the wishes of the majority of voters, as mediated through the professional ruling class – politicians, senior govt bureaucrats, key academics etc.
Of course, all political systems might have equal tendencies to inflate, but I think it is far more likely that some countries will be more susceptible to that temptation than others.
What are the factors that tend to differentiate countries’ resistance to inflation? Here are 3:
1. Is the country a net debtor or creditor? If it is owed more than it owes, what is the net value as a proportion of national income? Is the debt denominated in its own currency?
A country that, in the aggregate, gains a lot from devaluing its own currency will have one more incentive to inflate.
2. How large is the govt debt as a proportion of national income?
The political class doesn’t just implement the wishes of the majority of voters. There is a bias in favor of the interests of the govt as a separate entity. If the govt is heavily indebted to the country’s savers, the political class will tend to want to devalue that debt – by inflating, leading eventually to currency devaluation.
3. What is the debt culture of the country? Do people have easy come, easy go attitudes to debt? Do people respect their obligations to the old (who tend to be net holders of others’ debt)?
Countries that are tempted by notions like debt jubilees, or show weak support for the elderly, or easy bankruptcies, etc, tend to have political systems that favor inflation, because it transfers money from (generally older) savers to (generally younger) spenders.
I would say that the US is close to one end of the spectrum here, and a country like Japan is at the other end. So, over the long run, I would expect the US $ to devalue versus the Yen. This is exactly what has happened over the last 30 years, so it should come as no shock to anyone if it happens over the next 30 years. (Sorry if my time frames are too long for that quick buck.)
