by Christopher P Shelley

Created on: January 23, 2009

There's no reason to worry about a weak dollar because the dollar has and will continue to strengthen. Despite the record bailout spending, the interest rates being at record lows and the "Fed" running the dollar printing presses at full speed, the dollar has rallied and is regaining all the lost ground on the euro and other currencies. How can this be? There are two very basic elements at work. The first is the money supply and the second is the Obama administration's potential fiscal policy.

These days it's often we hear the scaremongering amongst gold bugs and other economic hacks regarding looming hyperinflation. We're told to put everything we have into gold so as to preserve our wealth when the fiat dollar collapses. This is the biggest load of crap to come down the pike in long time. These advertisements are reminiscent of the mafia 'pump and dump' schemes used for worthless stocks and could be a signal that the smart money is now selling their gold.

We're told that because the Fed is printing up dollars like there's no tomorrow and the Federal government is bailing out everyone and their mother in law with a Trillion dollars that "eventually" this will lead to hyperinflation and the end of the fiat dollar as a world currency.

There is some truth to the above: The "Fed" is printing up money, the federal government is spending like a drunken sailor and interest rates are at record lows, but it's not the whole story and it still won't lead to hyperinflation. As a matter of fact we'll be lucky if we avoid a depression, and continued massive deflation.

The answer to all this is found in the credit crisis. Literally trillions of dollars in credit have disappeared. Credit has dried up for many businesses and individuals. No longer can one use the equity in their house as a "credit card". Those with credit cards are having the limits reduced. Businesses have been unable to service their debt and banks despite the influx of liquidity, are still not loosening credit. Now and for the foreseeable future banks will refrain from lending as much as they did in the past decade.

The bottom line is that this credit crisis has decreased the overall money supply by around 3 Trillion dollars. If you're the federal government and you spend an outrageous 1 Trillion to save the economy, the net money supply has still contracted by 2 Trillion dollars! This net decrease means at the very least, a short term shortage of dollars. And a shortage of dollars means an increase in value.

The other factor is the new Obama administrations personnel and its potential policies. Obama has appointed Lawrence Summers to his economic advisory staff. Prof. Summers was the head of the Treasury during the Clinton years. He is a noted expert on Gibson's Paradox and the effect of gold on prices. It was he who experimented with aggregate prices by selling or leasing US held gold, which in 1995 lead to the infamous divergence of Treasury rates and the price of gold.

I could be totally wrong, but I'm guessing his policy will return with the new administration. If so we can expect the federal government to begin to sell or lease their gold which will again depress its price and therefore elevate the dollar all the while keeping interest rates low.

There's no way of knowing how long this set of circumstances will last. If consumers can once again buy a half million dollar house with bad credit and no money down we can then worry about a weak dollar' and hyperinflation'. But I'm assuming this is not going to happen for a long time.

So for now sell the $850/oz gold and buy the usd/eur.

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