Peter Schiff: A Tale of Two Dollars

The dollar has been on a tear in recent months. Just last week, the dollar index moved from 107 to 108 with an inter-week high of 109.3. The greenback also hit parity with the euro last week. The dollar is near a 20-year high compared to the European currency and a 24-year high against the Japanese yen.

And yet we have a massive devaluing of the dollar domestically. In his podcast, Peter tries to make sense of this tale of two dollars.

You can see the impact of dollar strength on import-export prices.

Export prices rose 0.7 on the month and are up 18.2% on the year – double the consumer price index. Peter noted that import prices are a better reflection of prices paid by consumers for domestically produced goods than the 9.1% CPI.

That is a real number, unlike the CPI that is a completely contrived, made-up number where you have a formula that’s reverse-engineered to come out with a lower number.”

On the flip side, import prices are much lower thanks to the power of the dollar. Nevertheless, even with dollar strength, import prices are still up 10.7% year-on-year.

It’s because the dollar is so strong that import prices are only up by 10.7% on the year. Because if the dollar wasn’t so strong, import prices would have gone up a lot more than that and that would have spilled over into the CPI. So, but for the strong dollar, we would have much higher inflation numbers than the ones we’re dealing with.”

The situation is the opposite overseas. Europeans and Japanese are paying much more for stuff they import from the US.

So, their weak currencies are exacerbating their inflation problem, whereas our strong currency is mitigating our inflation problem.”

Peter said the overall dynamics make no sense whatsoever. The US has the highest inflation in 40 years, and yet it also has the strongest dollar in 20 years. How can that be?

How can the dollar be so weak and yet be so strong at the exact same time?”

THE DYNAMICS

When you boil it all down, inflation is the loss of a currency’s purchasing power.

If our currency buys less, that means the currency is weakening. It is losing value. We need more and more dollars to buy the same quantity of goods and services.”

If the government gave everybody $1 million, we wouldn’t be richer in absolute terms. The limiting factor isn’t money. The government can print money at will. The limiting factor is always the availability of goods and services.

If the government sends everybody a check for $1 million, but the factories don’t produce any more products than they were producing before, if service providers aren’t providing any additional services than they were before, what happens? Well, the only thing that can happen is that prices have to go up so that Americans end up buying the same quantity of goods and services. They just pay $1 million more to buy them because each dollar that they have has less value. That’s basic supply and demand. As the supply of anything goes up, demand being equal, the value of that thing has to come down. So, if you double or triple the supply of dollars, the value of each dollar is going to lose a commensurate amount of value.”

That’s what’s happening in the US. It’s not so much that prices are going up. The value of the dollar is going down. There are trillions more dollars in the economy than there were a few years ago and therefore the value of each dollar is falling.

But while the dollar is losing value, it’s not been this strong in decades. It’s gaining value relative to other currencies.

That is the dichotomy. It’s a tale of two dollars. You have the domestic dollar that is weak and losing value. And then you’ve got this international dollar that is strong and is gaining value.”

The strength of the international dollar is helping Americans somewhat, but the weakness domestically is outstripping that international strength.

The question remains — why is the dollar so strong internationally when it’s so weak domestically?

During the inflationary period of the 1970s, the dollar got destroyed. It didn’t start rebounding until Paul Volker got serious about fighting inflation.

If you look at everything from a fundamental perspective, today’s inflation should be exacting an even larger toll on the value of the dollar relative to other currencies than it was back in the 70s. Yet, the opposite is happening. Inflation is actually turning into a boon for the dollar. The weaker the dollar is in America, the stronger it becomes overseas.”

Why is that? Where is all the demand for dollars coming from? Foreigners don’t need dollars to buy US products. The US is running a massive trade deficit.

The demand is coming from speculators.

Right now, the dollar is acting as an inflation hedge for everybody outside of the United States. It’s not an inflation hedge inside the United States. You can’t buy the dollar to hedge inflation if you’re an American living in the US because there’s no hedge. The dollar is losing value. … That’s not the dynamic that Europeans are looking at, or the Japanese. From their perspective, yields in the US are very positive because they’re looking at the appreciation of the US dollar.”

Keep in mind that inflation is a worldwide problem. All of the world’s central banks have expanded their money supply. For people outside the US, the dollar looks like a solution to that problem. As the old saying goes, it’s the cleanest dirty shirt in the hamper.

Ther is also a self-perpetuating dynamic in play. As foreigners buy the dollar to hedge their currency’s inflation, the dollar goes up, reinforcing the idea that it’s an inflation hedge. That suckers in more buying.

But Peter said none of this fundamentally makes sense.

The dollar is rising on the greater fool theory. Why are people buying dollars? Not because they need them to buy American products. They’re buying them because they think some greater fool is going to pay a higher price for their dollars in the future. … That can go on for only so long until ultimately the bubble pops. And that is what is going to happen to this dollar bubble. Because that’s what it is. It’s a massive reinforcing bubble where people are buying the dollar because it’s going up. And because it’s going up, people buy it.”

At some point, people will start selling dollars to get their own currencies back. Then what?

Peter said this is the primary reason the world isn’t rushing to gold. Right now, the dollar looks like a much better alternative to gold.

Right now, the dollar is stealing gold’s luster. For a while, it was bitcoin that everybody wanted instead of gold. But now it’s the dollar that everybody wants instead of gold. Eventually, people are going to figure out that they don’t want the dollar just like a lot of them figured out they don’t want bitcoin. There is ultimately going to be a rush into gold. As I’ve been saying, gold will be the last safe haven standing because it’s the only true safe haven.”

In this podcast, Peter also discusses the fact inflation is not due to “expectations,” the politics of inflation, and he explains why investors sheltering in dollars abroad are in for a rude awakening.