Doom and Gloom about the US economy

A few days ago I received an e-mail from a friend of mine which asked my opinion about the prospects for the US dollar and the US economy. Below is his e-mail (in italics) and my reply.

Carl,

I have been reading more and more about the currency wars and getting concerned. 

Many people say that between the Fed printing USD and oil being priced in Chinese yuan the US dollar is doomed. This will eventually lead to hyperinflation here in the US as the USD loses its global currency reserve status.

I personally have no idea if this will actually happen.  I have read about Russia & China coming to an agreement where China will buy oil from Russia paying in Yuan and the views that other oil producing countries will begin selling oil in currencies other than the USD.

Do you have any thoughts on this? There is no shortage of websites pushing this end of the US dollar and USA coming soon but of course each website is also selling something to profit from this coming doom!

Otto:

There will be no hyperinflation without the Fed's cooperation. They seem very reluctant to let the inflation rate move much above 2%. The 10 year Tips - note spread predicts 2.6% annual inflation for the next 10 years so the market has a lot of confidence in the Fed's commitment to keep inflation low.

That said I think the Fed is much more concerned about domestic economic conditions than about the value of the dollar. But notice how they have dragged the Bank of Japan and the Swiss along in the QE compaign. The rest of Europe will soon follow or fall into the economic abyss. Since all the big powers will evntually embrace some version of QE and follow the Fed I don't see how the dollar is going to drop much in the long run because of monetary expansion.

The US is the strongest economic power in the world. Soon it will be the biggest oil producer and is already the biggest natural gas producer. It has the  freest market system and is home to the  most innovative business entrepreneurs. And you say that there is a danger that people might prefer to trade in yuan, not dollars?

  Apparently the message has not gotten through to the world's criminal classes - who spit on payments denominated in any restricted currency like the yuan. Free traders trade in dollars or euros or yen and trade in dollars is the biggest by far in volume.

China looks strong because they are getting up to speed after being impoverished by the 1949- 1984 experiment with central planning and communist repression. Russia looked strong in the 1950's because they were starting from a very low base, just like China today.

But if history offers any lessons it is that government controlled economies (of which China is an example even now) eventually hit a ceiling beyond which progress is no longer possible. This led to the collapse of the Soviet Union. It also happened in China starting around 1400 when the combination of the European Renaissance and Chinese imperial repression of  creative thought and action started China's long slide into poverty from which she is only just emerging.

The doomsters always have something to worry about and this has been true as long as I have been active in markets, a period of nearly 50 years now. Experience teaches that in the long run the doomsters are always wrong and are either forgotten or become a laughing stock for sensible people. I don't see any reason for thinking the fate of the current crop of doom predictors will be different.

I had a friend once who thought that the doomsters were all secretly financed by the Trilateral commission to scare the little guy into making stupid choices. I don't share his cynicism but it is certainly consistent with the facts.

Carl