Doug Noble, Bill Gross, Henry K. Liu on the Dollar

Doug Noble, Bill Gross, Henry K. Liu

Noble consistently views the loose-dollar policies of the fed and the securitization of debt by wall st or shadow finance as distorting credit markets, preventing the flow of credit to where its best employed and its proper pricing and availability.

"Inflationism doctrine is riddled with failings: Easy Credit distorts system pricing mechanisms; foments destabilizing speculation; spurs societal wealth transfer; distorts the underlying economic structure; fosters financial fragility; and debases the currency – to name just a few. History – including recent history – validates this analysis"

loose dollar policy of this century did not result in destabilizing inflation rates, rather, led to the mighty swell of the credit bubble and consequent asset bubble in housing and oil. inflation is not so much to be feared as dollar distortion of economic investment away from production, towards speculation in housing and other hard assets. this will happen again as true structural rebalancing of the economy is again deferred in preference to reflation.

as global production picks up, the search for a more solid reserve currency will pick up. those nations which attempt to maintain the competitiveness of their currency will be tempted to follow the inflationary lead of the us dollar. a global distortion of investment predictably will follow.



For Gross, domestic interest rates must be kept low for an extended period to allow the economy to gradually reduce its debt load by financing it at lower interest rates. there is currently no sign that inflation is to be feared.

"Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services."

according to Gross, fixed assets have a dollar value perhaps 100% greater than what the real domestic production should support. nevertheless, according to Bill we need to maintain these inflated prices:

"This is where it gets tricky, however, because policymakers, (The Fed, the Treasury, the FDIC) recognize the predicament, maybe not with the same model or in the same magnitude, but they recognize that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms. The virus has infected far too many parts of the economy’s body, for far too long, to go cold turkey"

Gross calculates that the range of debt supporting asset prices is overpriced by 6% above what it should be. if the government doesn't at least support GDP stabilizing at 4-5%, there will traumatic price deflation and a spiraling downward of an econ that has become reliant on leveraging these overpriced assets.

While China pours money into production, the US tries to refloat overpriced debt. Would it not be better to pump money into production outlets and let the debts resettle lower without support?

the losers here are those with dollar savings. those savings will be able to capture only minimal returns. those possessing dollars will be tempted to gamble for higher yielding riskier assets.

who are the winners and losers with asset deflation?

we are told again and again, of the haunting lesson that Japan's econ of the early 90s represents for the us econ today. as was seen early in the recession, asset deflation can cripple debt markets, as lenders attempt to limit exposure to debt holdings. stimulus is key, this would represent a transfer of wealth from debt holders to those who are earning income by producing actual goods and services.


For Liu, the dollar, as all sovereign currencies, should have as the priority for its policy, to increase the real wealth of the country, the full employment of its resources and its work force. the role of global reserve currency sidetracks what should be the dollar's domestic role, and further distorts the currency policies of foreign countries.

the true value of the domestic currency is related to its purchasing power. currency policy should promote the full productive powers of the country, which in turn, will increase the value of the currency.

Question and Answer on Recession Dynamics - Fall 2009

Structural Origins
from its position as holder of the world's reserve currency, beginning in the early 80s, the us has moved to break the link between the domestic economy and consumption norms and the accumultation needs of capital. by the late 70s, the profitability of us captial weakened in the face of lower cost competition from europe and japan. the productivity/consumption nexus of development was disrupted by lower cost imports. the dollar weakened leading to the first and second oil crises.

the volker regime squeezed dollar obligations globally, the dollar denominated debts in the developing world soared with the rise of the dollar, collapsing those development models unable to meet rising debt payments.

how are existing debts affected by a rising dollar?

a rising dollar increases the cost of paying off a debt, while a cheaper dollar allows debt to be paid off at a lower cost to the debtor.

how are existing debts affected by a cheaper dollar?

for the creditor, a cheaper dollar increases the likelihood that the debt will be paid off, rather than go into default. however, the dollar recovered will not easily find comparable interest rates, in a sense the dollar recovered are devalued. the value of your dollar claims has been reduced by the lowered interest rates.

during this recession, this devalued dollar may still be able to purchase goods at a lower price. consumption may not yet show inflation, but investment opportunities will encounter the flooding market of dollars.

the current econ crisis

the current econ crisis appears as a 'debt crisis'. a loose dollar regime has led to a pyramid of debt claims unsupported by incomes.

why this extreme recession?

this is the more difficult structural problem of the us economy and its global role as unique superpower.


Temporary exit strategy for toxic debt levels

debt must be reduced dramatically. programs such as tarp, homeowner tax credits, cash for clunkers are attempts to prop up market, allowing past debts to float lower, but avoiding a catastrophic reduction. after this first phase, of preventing collapse, debt must again be allowed to be devalued. this will mean more bankruptcy for companies and individuals.

the stimulus

the stimulus program is an attempt to maintain production and incomes. this is different than the effort above to revive the credit markets through some debt support.

does the stimulus threaten our children's (grandchildren's) future with enormous debt?
government stimulus has the positive effect of maintaining and extending production. as a country we are better off for it. but won't the debt crush our grandchildren? children and grandchildren are, of course, already suffering from this great recession. they are paying from the debt machine which served to balloon wall street profits, but this is very different from the stimulus program.


isn't this just another debt balloon? this time a government debt balloon?
greater government involvement in the economy may lead to politication of choices of economic investment, more likelihood of corruption from control of which economic projects to fund. its probably a good idea to not have the government decide which economic projects to fund.

is greater gov participation in the econ socialism?
the us government has for a long time socialized expenditures for many of the most vital segments of the econ. we receive a public education, our health benefits are subsidized at our place of work, our retirements are made possible by social security and medicare, our country is protected by government military expenditures.
but most importantly the us government subsidizes captialist accumulation, we the tax payer provide enormous tax benefits to private corporations, in addition to spending on all matter of infrastructure costs. this is one aspect of socialism for captitalism.

too big to fail
as businesses morphed into multi-national enterprises, extending production lines and product sales globally, the demands for credit for consumers to more easily assure sales and debt for greatly enlarged production resulted in greater reliance and intertwining with financial markets. with the size of these companies now threatening to capsized the economy, the government becomes the final insuror of the greatly expanded debt, both for consumption and investment. we have too big to fail. this is another aspect of socialism for captial.

socialization of costs, privatization of profits. one possible solution is to tax the too big to fail companies to provide a rainy day fund for the inevitable future busts.