Is the Dollar Really Rising?

The U.S. government has been quietly increasing the money supply to historically unheard of levels. Here’s a chart from the St. Louis Fed showing the growth of the monetary base, also known as M0:

Eventually this must lead to runaway inflation. That eventuality is being delayed because the Federal Reserve is paying banks to deposit funds with the fed — a practice they have never done before.

Long-term, the dollar must inflate.  When this happens, the dollar will become less valuable in terms of both goods and services and in comparison to other currencies.  A dollar will buy fewer pizzas and less gasoline, but it will also buy few Euros or Yen.

In the short-term, however, something stranger is happening.  Take a look at this chart, which compares the Dollar and the Euro over the last 120 days:

The Dollar isn’t really rising, but the Euro is falling so fast that it makes the Dollar appear to be rising.

When we compare the U.S. Dollar to a stable currency, such as the Singapore Dollar, we see the reality of the situation:

The Dollar isn’t rising, but it also has yet begun to fall.  Long-term investment experts like Peter Schiff will tell you to get out of the U.S. Dollar and invest in more stable currencies, but in the short-term following this advice could cost you big money.

Market timing is can be maddening if you try to squeeze every last percent of return out of your investments.  The reality for most of us is that we have two choices:

• Get out of USD too early, which means we lose money every day that the Dollar stays strong.
• Get out of USD too late, which means that we lose money as soon as the Dollar starts to fall.

These are very difficult decisions with enormous financial implications.  For myself, for now, I am choosing the second option.

Whichever option you choose, keep your eye on the value of your dollars.  If you don’t, you could find yourself very poor — even though you own a huge number of dollars.