US Dollar: The Mother of All Bubbles

Thursday, June 17, 2010
By Paul Martin

Jesse’s Café Américain

A bubble is a significant increase in valuation supported by a set of artificial, inexplicable, and otherwise unsustainable conditions. The ‘increase in valuation’ can be nominal as in a price that goes ‘higher’ without a corresponding increase in value, or a decline in the value underlying the asset while the price remains nominally the same. (note 1)

True bubbles almost always involve some element of secrecy, a cover up, and some dispensation from common knowledge and experience. There are almost always dissenters, voices of warning, that are ignored and even ostracized. “It’s different this time…” without there being an identifiable difference, only the self referential rationale.

Stocks are not a bubble because they are going higher and the market is infallible. Housing cannot be a bubble because the housing market is so geographically diverse. You get the point. Not all things that increase in price are a bubble, but this does not mean that bubbles cannot be identified. They can, but when they serve some greater end, the voice of dissent are overwhelmed. Almost all bubbles involve control frauds and the corruption of the media, the analysts, and the regulators, to some degree, through benefits and intimidation.

When the artificial conditions are removed the valuation of the bubble ‘reverts to the mean, ‘ a more normal valuation based on the fundamentals, unadjusted and undistorted supply and demand. An asset bubble often involves a fraudulent design taking advantage of and even perpetuating a corresponding foolishness. In other words, the fraud is father to the folly.

The duration of a bubble does not make it valid or ‘the new normal.’ Like most chronic conditions it just means that the adjustment will be all the more difficult.

The US dollar as the world’s reserve currency, and the unusual period of US prosperity, is a non-historical artifact of the post World War II era that will not continue indefinitely. When the reversion to the mean occurs, it is likely that the dollar will have to be reissued as ‘the new dollar’ similarly to the rouble in the post-Soviet adjustment.

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