Dollar index comparisons with the '30s and '70s

[bart]

Dollar index comparisons with the '30s and '70s, for what its worth:



http://www.nowandfutures.com/images/usdx_1929_vs_2000.png





http://www.nowandfutures.com/images/usdx1966_1980and_now.png

[c1ue]

Bart,

Have you done any extrapolations as to what the specific major currency crosses would be should the USDX hit 60 as iTulip has predicted?

It seems to me that due to the inclusion of other nation's currencies, the implied drop of 25% from present levels would potentially mean even higher actual deltas - anywhere from 70% fall in US$ value to 40%.

Or am I insufficiently accounting for general currency racing to the bottom?

[Diarmuid]

Dollar index comparisons with the '30s and '70s, for what its worth:

Hi Bart

Excuse my ignorance, but I would just like to ask a couple of questions on the graph if you have time.

I found this definition on the web and the same appears many times in a google search

The US Dollar Index (http://www.investorglossary.com/us-dollar-index.htm) includes the exchange rates of the following six currencies: euro (http://www.investorglossary.com/euro.htm) (EUR), Japenese yen (http://www.investorglossary.com/yen.htm) (JPY), Pound (http://www.investorglossary.com/pound.htm) sterling (GBP), Canadian dollar (http://www.investorglossary.com/canadian-dollar.htm) (CAN), Swedish krona (http://www.investorglossary.com/swedish-krona.htm) (SEK), and Swiss franc (http://www.investorglossary.com/swiss-franc.htm) (CHF). The formula to compute the US Dollar Index (http://www.investorglossary.com/us-dollar-index.htm) is: US Dollar Index (http://www.investorglossary.com/index.htm) = 50.14348112 * ((EURUSD ^ 0.576) * (JPYUSD ^ 0.136) * (GBPUSD ^0.119) * (CANUSD ^ 0.091) * (SEKUSD ^ 0.042) * (CHFUSD^.036) ).

1. Where is the figure 50.14348112 coming from?.

2. The Index from what I have read (very limited) was established in 1971 after the decoupling from the gold standard and as such seems to me just a measure of dollar against other FIAT currencies, as the dollar was still tied to Gold after Bretton Woods and other currencies tagged to the dollar comparing the index in the 30s to present day curriencies is comparing apples to oranges? (I know I maybe missing something simple here).

3. Is there an index which compares the dollar to other currencies and factors in all FIAT currency (in the index) inflationary purchasing declines against a basket of commodities (oil, wheat, rice, gold etc..) , it seems to me this would give a better view on the current situation today when comparing historical data pre 1971 to post 1971 data and also give a better view of inflationary / deflationary data today?

If all of these are terribly simplified and stupid questions - apologies, as I say my knowledge of economics is extremely scant.

[bart]

Hi Bart

Excuse my ignorance, but I would just like to ask a couple of questions on the graph if you have time.

I found this definition on the web and the same appears many times in a google search

The US Dollar Index (http://www.investorglossary.com/us-dollar-index.htm) includes the exchange rates of the following six currencies: euro (http://www.investorglossary.com/euro.htm) (EUR), Japenese yen (http://www.investorglossary.com/yen.htm) (JPY), Pound (http://www.investorglossary.com/pound.htm) sterling (GBP), Canadian dollar (http://www.investorglossary.com/canadian-dollar.htm) (CAN), Swedish krona (http://www.investorglossary.com/swedish-krona.htm) (SEK), and Swiss franc (http://www.investorglossary.com/swiss-franc.htm) (CHF). The formula to compute the US Dollar Index (http://www.investorglossary.com/us-dollar-index.htm) is: US Dollar Index (http://www.investorglossary.com/index.htm) = 50.14348112 * ((EURUSD ^ 0.576) * (JPYUSD ^ 0.136) * (GBPUSD ^0.119) * (CANUSD ^ 0.091) * (SEKUSD ^ 0.042) * (CHFUSD^.036) ).

1. Where is the figure 50.14348112 coming from?.

2. The Index from what I have read (very limited) was established in 1971 after the decoupling from the gold standard and as such seems to me just a measure of dollar against other FIAT currencies, as the dollar was still tied to Gold after Bretton Woods and other currencies tagged to the dollar comparing the index in the 30s to present day curriencies is comparing apples to oranges? (I know I maybe missing something simple here).

3. Is there an index which compares the dollar to other currencies and factors in all FIAT currency (in the index) inflationary purchasing declines against a basket of commodities (oil, wheat, rice, gold etc..) , it seems to me this would give a better view on the current situation today when comparing historical data pre 1971 to post 1971 data and also give a better view of inflationary / deflationary data today?

If all of these are terribly simplified and stupid questions - apologies, as I say my knowledge of economics is extremely scant.


I'm sure you've heard it before, but its my belief that there is no such thing as stupid questions. I had to ask the same questions and many more as I was coming up to speed... and that old saw about knowing more only means that you realize how much you don't know is so true. But to your questions:

1. It's just an arbitrary constant number that made the value start at 100 back in 1973 when the dollar truly officially started to float, and then the value was calculated back to 1971 and prior.

2. Sort of... but most countries went off the gold standard in the early 1930s or even in the late 1920s, and in my opinion were already fiat currencies by the mid 1920s or so. Additionally, they did trade against each other and did vary a lot in value as you may have seen on my British pound chart.
Lastly, why shouldn't a index value be able to be calculated? Do take into account that gold did actually flow into and out of the various countries when they were on the gold standard too (to settle balance of payments issues, etc.), especially during WW1 and into the 1920s where Europe was going through very difficult recovery pains.

3. The answer is basically no, although you could view something like the long term CRB index data ( http://www.nowandfutures.com/images/crb_1900on.png ) to get an idea of comparisons. But it has quite serious problems too, since the various commodities vary wildly in price, have supply & demand factors of their own, are subject to wild variables like weather... and even of course things like the KaPoom cycle or my own paper vs. hard asset cycle.

Finster's FDI is by far and seriously the best thing I've ever seen in the area.... and I'm not just saying that because he sends me a 1 ounce Kruggerand every time I do... ;)

[Diarmuid]

I'm sure you've heard it before, but its my belief that there is no such thing as stupid questions. I had to ask the same questions and many more as I was coming up to speed... and that old saw about knowing more only means that you realize how much you don't know is so true. But to your questions:

1. It's just an arbitrary constant number that made the value start at 100 back in 1973 when the dollar truly officially started to float, and then the value was calculated back to 1971 and prior.

2. Sort of... but most countries went off the gold standard in the early 1930s or even in the late 1920s, and in my opinion were already fiat currencies by the mid 1920s or so. Additionally, they did trade against each other and did vary a lot in value as you may have seen on my British pound chart.
Lastly, why shouldn't a index value be able to be calculated? Do take into account that gold did actually flow into and out of the various countries when they were on the gold standard too (to settle balance of payments issues, etc.), especially during WW1 and into the 1920s where Europe was going through very difficult recovery pains.

3. The answer is basically no, although you could view something like the long term CRB index data ( http://www.nowandfutures.com/images/crb_1900on.png ) to get an idea of comparisons. But it has quite serious problems too, since the various commodities vary wildly in price, have supply & demand factors of their own, are subject to wild variables like weather... and even of course things like the KaPoom cycle or my own paper vs. hard asset cycle.

Finster's FDI is by far and seriously the best thing I've ever seen in the area.... and I'm not just saying that because he sends me a 1 ounce Kruggerand every time I do... ;)

Thanks Bart for your time and explanation

[Diarmuid]

I'm sure you've heard it before, but its my belief that there is no such thing as stupid questions. I had to ask the same questions and many more as I was coming up to speed... and that old saw about knowing more only means that you realize how much you don't know is so true. But to your questions:

1. It's just an arbitrary constant number that made the value start at 100 back in 1973 when the dollar truly officially started to float, and then the value was calculated back to 1971 and prior.

2. Sort of... but most countries went off the gold standard in the early 1930s or even in the late 1920s, and in my opinion were already fiat currencies by the mid 1920s or so. Additionally, they did trade against each other and did vary a lot in value as you may have seen on my British pound chart.
Lastly, why shouldn't a index value be able to be calculated? Do take into account that gold did actually flow into and out of the various countries when they were on the gold standard too (to settle balance of payments issues, etc.), especially during WW1 and into the 1920s where Europe was going through very difficult recovery pains.

3. The answer is basically no, although you could view something like the long term CRB index data ( http://www.nowandfutures.com/images/crb_1900on.png ) to get an idea of comparisons. But it has quite serious problems too, since the various commodities vary wildly in price, have supply & demand factors of their own, are subject to wild variables like weather... and even of course things like the KaPoom cycle or my own paper vs. hard asset cycle.

Finster's FDI is by far and seriously the best thing I've ever seen in the area.... and I'm not just saying that because he sends me a 1 ounce Kruggerand every time I do... ;)


Guido Hülsmann: Unethical Money Production

http://www.lewrockwell.com/podcast/?p=episode&name=2009-08-05_128_unethical_money_production_.mp3


I recently listened to an episode of Lew Rockwell where he was interviewing Guido Hülsmann Professor (Austrian) of economics at the University of Angers (http://www.univ-angers.fr/UFR.asp?ID=5&langue=1). In the interview he indicated the EU, and Japan were being forced to engage in QE or increasing the money supply to prevent the dollar / pound declining quickly relatively to your own currencies and to prop up gilts and treasuries (I am sure to maintain their own export competitiveness also) , he argued while a decline maybe good for the Euro / Yen and their soverign debt in the short term, a recovery in either of the anglo-saxon economies would see the reverse happen where funds moved back into the anglo-saxon economies and out of the EU and Japan.

Got me thinking to this thread and wondering if you or anyone else has tied in the Money supply expansion / QE in these economies to the dollar index or FDI and would such a garph provide much analytical value?

[friendly_jacek]

I strongly believed 1970's is the best analogy for now (specifically, 1975).

That gets me worried though as dollar surged and PM plummeted 1975-1976. I don't know why as the rates were going down at that time. Maybe export surged?

Any chances of that happening now?

[ThePythonicCow]

The exponential rise over the last thirty years of debt-based currency has flooded out ordinary distinctions.


Those of us who carefully read our Modern Portfolio Management texts in the 1990's to better balance the asset allocation of our portfolios are now reading each Finster post twice, adapting to a new "it's all one market" world of dollar versus dollar-denominated assets.
Separate and self-substaining economic regions and nations of the world have their economies flooded by the globalization of debt-based currency profit seekers.
The great stock exchanges in New York have become electronic light shows in which even video game trained youth cannot keep up with the high frequency trading computers amusing themselves.
All currencies, all debt, all markets, all nations are tossed about by the turbulence in this flooding storm of debt-based currency. Just as the U.S. stock market asset classes have become highly correlated against the dollar, so are the world's debt-based currencies becoming highly correlated with each other and the dollar.
Enormous corruption, at all levels and in all places, but especially in the highest levels of wealth and most powerful places, grows like a metastisizing cancer on this turbulence.

Our usual ratios and metrics can help us measure the stress in the system as the final crescendos rise, but they do not reliably forecast the nature and timing of the final collapse.
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<embed src="http://www.youtube.com/v/j-zczJXSxnw&hl=en&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" height="344" width="425"></object>

What sways together collapses together.

[doom&gloom]

i've fished under that bridge. easy to catch rockfish, but never got a
lingcod i wanted to catch so badly...

[friendly_jacek]

Bart,
According to this chart of yours (below), the gold situation looks like 1976 already and had it's correction already?
Very confusing and yes, I know that the past rhymes but doesn't repeat itself.

http://www.nowandfutures.com/images/activity_indicator_gold_long.png