Flutterby™! : currency valuation 2006-12-14 19:16:58.669774+00

currency valuation

2006-12-14 19:16:58.669774+00 by Dan Lyke 3 comments

Huh. What does this say about the possibility that U.S. currency is massively overvalued and we could be in for a bit of monstrous inflation or other devaluation in the near future? NY Times: Rising Metal Prices Prompt Ban on Melting and Export of Coins:

According to calculations by the Mint, the metal value of pennies, which are made of copper-coated zinc, is now more than one cent. The metal value of 5-cent coins, made from a copper-nickel blend, is up to 7 cents. Adding in the costs of manufacturing means the Mint now spends 1.73 cents for every penny and 8.74 cents for every nickel it makes.

I don't know if this leads inevitably to the conclusion that US currency is overvalued, Dan - although I would personally think that it is. It just seems to me to be a statement about the metals market. I don't think the metal market is going to cool down, as demand continues to outstrip supply and we have mined all the easy-to-get stuff, so by trying to figure out how to make cheaper coins, I think the Mint is probably going the right way. I'm holding out for plastic coins. Of course someone could counterfeit them, but really, who would counterfeit nickels?

#Comment Re: made: 2006-12-15 09:53:58.554412+00 by: jeff [edit history]

The fact that our currency is overvalued is more a function of interest rates, which have been kept artificially low by the feds. With manual labor being outsourced to Mexico ("insourced" to illegal Mexican labor), manufacturing jobs being outsourced to China, and high-technology work outsourced to India, the average American is mostly kept alive (drugged) by a cheap money supply and relatively cheap energy. Here is what Ron Paul has to say about our currency overvaluation:

"The financial press reported last week that the value of the U.S. dollar plummeted to a 14-year low against the British pound, and weakened against the Euro and Yen. Many financial analysts predict continued rough times for the dollar in 2007, given reduced expectations for economic growth at home and less enthusiasm among foreign central banks for holding U.S. debt.

This decline in the value of the dollar is simple to explain. The dollar loses value as the direct result of the Federal Reserve and U.S. Treasury increasing the money supply. Inflation, as the late Milton Friedman explained, is always a monetary phenomenon. The federal government consistently wants to spend more than it can tax and borrow, so Congress turns to the Fed for help in covering the difference. The result is more dollars, both real and electronic-- which means the value of every existing dollar goes down.

Federal Reserve Chairman Ben Bernanke faces two basic ongoing choices: raise interest rates to prop up the dollar, but risk pushing the economy into a recession; or lower interest rates to stimulate the economy, but risk further declines in the dollar. This unfortunate dilemma is inherent with a fiat currency, however.

Of course Mr. Bernanke inherited this tightrope act from his predecessor Alan Greenspan. The Federal Reserve did two things to artificially expand the economy during the Greenspan era. First, it relentlessly lowered interest rates whenever growth slowed. Interest rates should be set by the free market, with the availability of savings determining the cost of borrowing money. In a healthy market economy, more savings equals lower interest rates. When savings rates are low, capital dries up and the cost of borrowing increases.

However, when the Fed sets interest rates artificially low, the cost of borrowing becomes cheap. Individuals incur greater amounts of debt, while businesses overextend themselves and grow without real gains in productivity. The bubble bursts quickly once the credit dries up and the bills cannot be paid.

Second, the Fed steadily increased the monetary supply throughout the 1990s by printing money. Recent Fed numbers show double-digit annual increases in the M2 money supply. These new dollars may make Americans feel richer, but the net result of monetary inflation has to be the devaluation of savings and purchasing power.

The precipitous drop in the dollar shows how investors around the globe are very concerned about American deficits and debt. When government policies in a fiat system are the sole measure of a currency's worth, the currency markets act as a reliable barometer of how those policies are viewed around the world. Politicians often manage to fool voters and the media, but they rarely fool the financial markets over time. When investors lack faith in the U.S. dollar, they really lack faith in the economic policies of the U.S. government."

With average Americans unable or unwilling to save, the reality of all this fiscal foolishness and lack of political courage on the part of politicians to save the middle-class (by keeping jobs in America for AMERICANS) will rear it's ugly head in our lifetime, and even more in future American generations.