3 From 2001 to 2008, the dollar collapsed 41 percent: While that 94 percent drop in Buffett’s lifetime is substantial, the past decade saw a full-blown collapse. The buying power of the dollar was cut nearly in half from 2002 to 2008.
That collapse was triggered by the ultra-low rates by the Federal Reserve, and an (arguably) unpopular U.S. war in Iraq. The rates under Alan Greenspan kicked off a vicious cycle of increased prices, low returns on bond investments and higher inflation. Price spikes in oil, gold, food and housing — everything priced in dollars — followed.
4 The weak dollar policy forces money into riskier assets (and punishes savers): The Fed hasn’t explicitly stated that cash is trash, but it might well have. After Chairman Ben Bernanke’s op-ed in The Washington Post in November, many observers concluded that the Fed was trying to force cash out of hiding into the economy.
Just as deflation encourages consumers to hold onto their money and wait for lower prices, inflation encourages consumers to spend their cash and beat the price increase.
With rates low and the dollar’s value in decline, some have argued that the Fed is forcing money into more productive uses. In theory, that includes expanding businesses, hiring and making capital investments.
What has really happened? While there has been some business hiring, it has been sub-par — typical in a post-credit crisis recovery. But it has led to speculation in commodity and equity markets. Rising stock prices and soaring commodity prices are a function of the Fed blunting the dollar.
5 In the land of the blind . . . There are four major currency blocs — the dollar, the euro, the yen and the yuan. With so many factors against it, why would anyone want to own U.S. dollars? Because, well, it’s the least ugly currency of the lot.
The Europeans are still not only dealing with an ongoing banking crisis. Portugal, Ireland, Italy, Greece and Spain all have solvency problems. Lacking their own currency, these nations cannot simply print their way out of debt. Thus, there is a small but real possibility that the European Union will not hold, and the euro will collapse.
Japan is even worse. It was mired in a multi-decade slog, and then the earthquake/ tsunami/nuclear crisis rocked it back on its heels.
That leaves China. Despite market reforms, it is still a totalitarian communist regime. Western nations are none too keen about making its currency the reserve of the world.
To the dollar then. In the land of the blind, the one-eyed man is king.
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He runs a finance blog, The Big Picture.
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