When I started this blog on a different site some time back, I had the naive perception that my views on global monetary policy were somewhat unique.
Ever since 1998, I have had the expectation that the US dollar would collapse due to high debt and large trading deficits, with massive inflation as a result, eventually leading to the demise of the dollar as the world's global transaction currency, and the US losing its status as the world's unchallenged economic super-power. A position it has held since the end of World War I.
When the Euro was introduced, I celebrated its creation, thinking it would gain strength as a credible alternative to the dollar, with the possibility of minimizing negative impact on the world economy as the dollar collapse progressed. The absence of sovereign control over monetary policy could only strengthen the currency's credibility, I thought, and considered it madness when the Euro dropped to close to 0.8 to the dollar four months after it was introduced on January 1st 2001.
When the Euro peaked at 1.6 against the dollar in early 2008 (with the value of Eurozone GDP reaching par with the US), I took it as a sign that the expected dollar collapse was happening before my eyes. At that time, the leverage in the US economy was unmatched, and had it not been for hyper-aggressive intervention by the Fed, the US banking system would have dis-integrated into a nasty long-lasting deflationary spiral, with the possible outcome of total and utter chaos. The gold-price also rallied together with the Euro, however, as the Euro's structural problems were yet to surface, the rally in gold took new turns when it surfaced that the Euro was a poorly regulated initiative, due to the ECB lacking supervision of domestic lending in member countries, and outright accounting fraud in the case of Greece.
In retrospect, the dollar collapse has largely taken place, but the transition has been gradual, little by little every year, and the major impact has been felt in the real economy, and to a lesser extent in financial markets. When measured in the relative purchasing power of the American consumer versus consumers in the countries of trading partners, there is still substantial room for the dollar to correct, as the US current account deficit is still 3% of GDP (though more than halved from its 7% peak in 2006). With debt fueled consumption re-ignited by Bernanke's QE measures, the current account deficit is again heading for an increase.
The dollar collapse has manifested itself primarily in rising wages (in USD terms) in developing economies with large current account surpluses (e.g. China, India, Gulf states, Latin America, Russia, etc), and secondarily in the prices of gold and oil, as wage increases in these economies have allowed consumers to purchase increasingly more of these commodities. To take gold as an example - in 1980, Europe and the US accounted for jointly 80% of global gold purchases. In 2012, the number was less than 20%, and is set for record lows in 2013 as ETF gold outflows are absorbed by buyers in what was previously characterized labelled as the "developing world".
In retrospect, Bernanke's QE measures should be celebrated rather than criticized, as they are allowing for a "soft" devaluation of the dollar, with export based economies gradually shifting towards more domestic consumption, rather than changes taking place through a brutal correction.
However, the changes are far from complete, and will continue to dominate the world economy for the next two decades to come. As the paradigm shift is happening gradually, and it is beyond doubt that the current up-tick in the US economy is just a blip against a long-term trend of continued demise.
Will the new paradigm be a bearparadigm? Yes, however perhaps not in the sense of being a financial bear market, as was reflected in the title initially intended for this blog.
It will more likely be a panda-bear paradigm.