Sunday, December 2, 2007

Weak Dollar

Dutch Evans up with another interesting post on monetary policy today. Essentially he says the weak dollar is no big deal and links to a respected economist who shares the same opinion.

Well, I'm certainly not a respected economist, and I have a high % of my personal money in precious metals (which are a bet that the dollar will continue to weaken) so I'm completely biased in this discussion.

However, I think a weak dollar is a big problem. A weak dollar is a symptom of inflationary monetary policies. We're creating more dollars than there are demand for, so the value goes down. Someone has to own every dollar created, more or less, so the price of a dollar (in terms of other currencies and metals) changes accordingly.

A weak dollar is fine while things are honky dory, because people (foreigners mostly) step up and buy them and it's not so painful. However, a weak dollar is really an abdication of monetary and financial discipline. We're essentially letting the market police us, rather than policing ourselves. That's the problem, not the absolute level of prices or the dollar.

Until you've been shut out of the capital markets you have no idea how rough Mrs. Market can be in her policing ways. Ask mortgage brokers right now how it feels. For the longest time any loan could be sold off. Then one day the banks cut mortgage brokers' credit lines and the market stopped buying the loans. Tough times started immediately. Because the whole loan and credit evaluation process was taken out of the local bank branch office and a formula based system (credit score) was instituted, credit became a lot easier to access (a good thing) but there were few breaks on the system (a bad thing). We relied on Mrs. Market which on balance is good, but some responsibility would have limited the bust.

Ask biotech startups and newly public companies what it felt like in 00'. Or Technology startups in 2001-2002. I was there (in investment banking) for both of those and it was not fun. Lot's of good ideas and nice people were hurt.

The moral of the story is policing oneself is the smart thing to do. Letting the market police yourself, works most of the time, but it can end very badly.

(Sorry to sound like such a whiner and doomsdayer. I don't think the world will end but I don't think we're being very responsible right now).