Skip to main content

Bloomberg: weak dollar, inflation "illusory"

Apparently, the continued erosion of the US dollar's purchasing power and the ensuing inflation we've witnessed since 1975 has been merely an illusion.

So says Bloomberg in an astonishingly misleading article entitled, "Weak dollar illusory as correlated trade gains show"

For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.
Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes.

That was four years after the Bretton Woods agreement, set up in 1944 to link currencies to the price of gold, collapsed. The U.K. pound has dropped 34 percent and the Canadian dollar has fallen 6 percent."

Using the Bloomberg Correlation-Weighted Currency Index as a value benchmark, the writer purports to show that the dollar is just "as valuable" now (more so!) as it was in the period just after Nixon "closed the gold window" and removed the last vestiges of the gold standard in 1971.

Here's an explanation of Bloomberg's weighted currency index:

The Bloomberg Correlation-Weighted Currency Indices (BCWI) provide an indication of the relative strength or weakness of one currency against the world, i.e., a representative basket of currencies."

The problem, of course, with assigning the dollar (or any fiat currency) a value based on the measure of a basket of currencies is that these currencies are all going down (gradually, over time) together. There is no consistent reference point for measuring true value.

This is how one editorialist, named Goldrunner, explained it:

"...We introduced how the Dollar Index can only be considered a fiat pricing scheme since it cannot reflect the value of the Dollar. Value can only be determined against a constant reference point- certainly not against a basket of items that are constantly changing."

This is particularly true during a time period when most currencies are being devalued like the time period we are now entering. This is because a group of currencies that are all falling in value, if priced against each other, will leave the currency falling the least looking as if it has risen. Down is then up.

You may be interested to see how the US dollar has fared against gold in recent years.

Chart courtesy of
While the index measurement shows the dollar to be holding steady (thanks to the "down is up" bias of said index) in the chart above, gold has still handily outperformed over a five year period. In fact, the precious metal, which started the period at a price of $411 an ounce has increased to over $1050 an ounce, a gain of over 150 percent.
Gold has increased over that period, not (as some would have you believe) because of a speculative "bubble", but because it's role as an international safe haven currency and a historical store of value (purchasing power) have been rediscovered by a new generation of investors.
There is far more to today's Bloomberg article than the dollar/gold relationship and confusion over the loss of our currency's purchasing power over time (see, for example Tim Geithner's eminently fadable opinion on the US government's AAA debt rating), but we'll have to address some of these themes in our next post (Update: see, "How far will Greece's problems spread?" for more on this).
In short, I've come to expect a bit more from Bloomberg than this. Hopefully, next time they will do their readers a real service by reporting the truth about our currency's gradual decline in purchasing power, sad as it may be. They might even look to their own data service & charts for help.

Popular posts from this blog

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore . Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf). But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry). "During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and

New! Finance Trends now at

Update for our readers: Finance Trends has a new URL!  Please bookmark our new web address at Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner .   Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead! As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter . You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter).  Stay up to date with our real-time insights and updates on Twitter .

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi