US Dollar a Sort of Monetary Brand


The US dollar is a sort of monetary brand. And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their “must- have” caché. Sometimes, a brand can disappear entirely, as did Pan American Airways or “Members Only” jackets. But there is always something else waiting to take its place. So it is with the US dollar, a brand making lows in the financial markets.

The dollar has been the “Coca-Cola of monetary brands,” says James Grant, editor of Grant’s Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of The New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the “Gray Lady” fetches only $8 per share.

“What happened?” Grant asked. The World Wide Web happened, he says. “The Times has hundreds of reporters, but this is a story they seem to have missed.” As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against it headquarters building. The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The US Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant’s Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him “The Man Who Made Too Much” after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we’ve never seen before. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

Percentage Change in Monetary Base

You’ve probably seen this chart, or some variation of it. Still, there haven’t been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that’s because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, “almost 1-to-1 between the two,” Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The US is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson’s interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, “gold has been a perfect hedge against inflation.”

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching “$3,000 or $4,000 or $5,000 per ounce” as Paulson said.

I keep thinking how future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil settling up trade in their own currencies. The Russians and others openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

As for a replacement waiting in the wings, Grant offers up gold. Indeed, a kind of “de facto gold standard” seems to be taking shape. The SPDR Gold Trust, the largest gold-backed security in the world, is now the sixth largest holder of the metal in the world. Anybody with a brokerage account can easily buy gold today through the trust, which trades on the NYSE under the ticker GLD.

It’s still early. Most people still own no or very little gold. As it becomes clearer what’s happening, they will buy more gold, especially as it is now easy to do so.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I’m betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: “Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency.” Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.


Chris Mayer,
for The Daily Reckoning Australia

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.


  1. The ownership of tangible assets is the only true ownership there ever was. Debt, however small, can wipe it all out overnight, and cash is fleeting. Gold will probably do well, but so will a whole host of other (perhaps more necessary) things.

    The monetary base is being cleverly washed into circulation – in the form of profits for the financial institutions that were _chosen_ to survive. This is how they are redistributing the wealth away from the unwashed masses, towards the non-working (yet very much employed) financial class. This is why there is no inflation right now – no ordinary people have seen the money yet to talk up prices. Socialism for the rich is what I think it was termed some time ago – and it’s coming along very nicely for them.

  2. Where does this scenario fit in?
    Russia-China cooperation a step closer to LaRouche’s Four Powers agreement
    The economic agreements signed by China and Russia during Russian Prime Minister Vladimir Putin’s 12-14th October visit to China, demonstrate the potential for rapidly transforming regional as well as bilateral international relations, if Lyndon LaRouche’s “four power” agreement among the U.S., China, Russia, and India is carried out. The agreement under which China will help Russia construct a national high-speed rail system, can play a key role in helping China break from its current dependency on labour-intensive exports to the West.

    As a commentary published in the Chinese People’s Daily on 16th October stated, the memorandum of understanding on high-speed rail construction in Russia, signed by the Chinese Ministry of Railways and the Russian Ministry of Transportation, “signifies that China’s one-sided importation of technology from Russia has come to an end. Nowadays, it is China’s turn to help Russia build high-speed railways. Besides, China can also import nuclear technology from Russia, while exporting to it the related technology for liquefying high-quality coal at high temperatures.”

    China has been building a huge national high-speed rail network since 2005, which will have 13,000 km of track by 2012. The cooperative project will both reconstruct existing lines in Russia and build new ones dedicated to trains which can run 350 km/h or more, will increase Russia’s high-speed lines from 650 km to 10,900 km over the next 20 years. The two nations also signed a freight transport agreement on 14th October, which will increase traffic between China and Europe.

    The next day, Russian and Chinese enterprises signed an agreement to build a “super shipyard” in Vladivostok, ships, and other maritime infrastructure using the most modern technologies, Novosti reported 17th October. Eastern Russia lacks modern shipyards, an area where China has been moving forward, and the project will reduce Russian dependence upon foreign builders.

    Other Eurasian rail cooperative projects could also be pulled off “the back burner,” where they have languished the past several years. On 15th October, Russian Railways head Vladimir Yakunin signed an agreement with Mongolia’s Transport Minister Khaltmaa Battulga, to build a railway which will make it possible to exploit mineral resources of the South Gobi region. As Yakunin stated, the rail line will give landlocked Mongolia access to Chinese, Russian, and North Korean ports. Chinese, U.S., and South Korean officials and entrepreneurs were present at the conference on expanding Mongolia’s rail network, where the agreement was signed.

    In India, Prime Minister Manmohan Singh has proposed using China’s massive rail construction, as the benchmark for India to expand and rebuild its own large but dilapidated rail system, the Hindustan Times reported 17th October. China has been expanding its rail network at least three times faster than India has, and investing 50 times more funds. China has also been requested by Kathmandu, to expand its Tibetan rail line to Nepal. The project could stir India to build long-discussed rail lines into the Himalayas.

    Lyndon LaRouche commented that the action by China to invest in these development projects in the Far East will tend to bolster the physical value of the U.S. dollar—and thereby the world economy—in opposition to the alarming devaluation of the dollar by the U.S. Federal Reserve and Treasury Secretary Timothy Geithner.

    “What you have, is you have a virtual bond issue kind of thing in China,” Mr LaRouche said. “That trillions of dollars of U.S. debt to China have been institutionalised in the form of a bond issue and similar kinds of things. Now, the point is, the bond issue as such, is one-sided, it’s just the debt of the United States. The only thing that secures that debt of China, is the debt of the United States. So if the United States goes down, with just that bond issue sitting there, as presumably against the U.S. dollar, and the dollar sinking, that bond issue isn’t worth much.

    “However,” Mr LaRouche continued: “If the government of China takes the U.S. dollars which are owed to it, in terms of the bond issue, and uses those dollar assets as credit for a large-scale railway and related agreement with Russia, and with other nations of that region, implicitly, suddenly, since that money, represented by the bond issue, used for that purpose, is actually invested in something which has worth, you have now effectively monetised it. That is, you have made it, negotiable, it’s a negotiable asset. It’s not an asset hoping to be rescued by the debt on the United States which will never pay it. Now, those U.S. dollars, involved in this Chinese bond issue, being invested in this cooperative operation with Russia, on rail and related developments, has now got some intrinsic worth to it, in terms of these physical assets it’s creating.

    “So that, in itself, is a very important, and a very significant step. It is specifically a step in the direction of what the Four Power agreement would represent. And we don’t mean just four nations, we mean the four nations-plus—that is, the nations who will jump in on the same package, together with the Big Four. … It’s a substantial step in that direction.”

    Mr LaRouche concluded, “All that’s required now, since India will easily come into this thing, and since nations such as Korea, including North Korea, Japan, Mongolia, and other countries will come into this game, this is a very significant development. It’s not one that’s going to solve all the problems in the world. If the United States joins this thing, as a Four Power agreement, the way I’ve indicated, then we’re on the road to rescuing the world from the greatest threat to civilisation in known history.”

  3. Landbridge is too expensive vs ocean for freight and vs air for passengers over longer disatnces. If you are talking about opening up central Asia with rail or using it like the transiberian due artic waters realities OK but forget about Europe unless in an emergency where the US and its allies start sinking or blockading shipping again like they did to challange the Japanese empire before WWII. Higher speed rail efficiency is only effective for passenger in high density -300km scenarios that make gains by clearing the origin/destination metro areas faster than transits to airports. When you have the need to create a complex hub & spoke system as demanded by the service of significant central Asian locations, high speed rail is not feasible and hub busting air will always beat it for passenger and freight will ride on price based on low speed rail or hub busting truck or multimodal with an ocean basis. Rail has a place but whenever you see rail as panacea solutions you know that it is rubbish.

  4. The AUD price of gold has been quite stable over the last few months, whilst it has risen considerably in USD terms.

    The AUD has appreciated considerably against the USD at a rate which surprises me(anyway). The RBA raising its target rate and threatening further rises (in the face of a depreciating USD), is beginning to make me wonder whether it has not switched to a different ‘peg’.


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