According to Milton Friedman, "inflation is always and everywhere a monetary phenomenon."
If that is true, then you have to wonder where the heck all of the inflation is.
Every central bank in the Western world is holding interest rates down, and almost all of them are printing money like it's going out of style.
Five years ago, nearly every economist in the world would have told you this would cause inflation to skyrocket, and the big deficits governments were running would make matters even worse.
Taken together, monetary and fiscal policies are far more extreme than they have ever been.
Yet, inflation has remained rather tame. In Friedman's world that just wouldn't be possible.
But today inflation is only running at around 2%--well below where it should be according to his monetarist theories.
What does it all mean?....
It means even Nobel Prize-winning economists can get it wrong-at least in the short run.
Here's why Friedman has been wrong on inflation so far. It starts with his basic theory.
U.S. Dollar Forecast: How to Play A Short-Term Rally and Defend a Long-Term Crash
The U.S. dollar is currently on an upswing - but don't let it fool you.
What we're seeing is only a short-term rally inspired by Europe's travails. In the long-term, the U.S. Federal Reserve's loose monetary policy and the United States' own debt burden will drive the greenback back down.
That's the consensus among experts who follow the global money markets and the leading currencies, including several of Money Morning's own analysts.
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Three Reasons Why the U.S. Dollar is Really Rising
By all accounts, the U.S. dollar should be the functional equivalent of a Zimbabwean bill.
The Fed has pumped trillions into the worldwide financial system as part of misguided stimulus efforts that should be incredibly inflationary.
Yet, instead of a disastrous repeat of the Weimar Republic, the U.S. dollar has strengthened considerably.
This despite rising unemployment, slowing economic growth and a debt debate that's about to begin anew.
Since last July, the U.S. dollar has risen against all 16 major currencies while the Intercontinental Exchange Dollar Index is up 12%, according to Bloomberg.
In fact, the greenback is now higher than it was when the Fed engaged in Operation Twist in late 2011 as part of a plan to keep the dollar low by buying bonds.
So much for Club Fed's plans...
As usual, they don't really have a clue about how real money works -- let alone why it flows and where it's going.
Taking the Mystery Out of the U.S. DollarHere are the three reasons why the U.S. dollar is really rising:
1. Institutions are unloading gold to raise cash against anticipated margin calls, redemption requests, or both. They are parking that money in treasuries and in dollars, creating additional demand. There are simply more buyers than sellers at the moment, so prices for dollars and treasuries are rising. And not just by small amounts, either.
2. Institutional portfolio managers and traders are required to maintain specific classes of assets under very specific guidelines. These guidelines dictate everything from the amounts being held to the quality of specific investments.
Many, for example, are required to hold only AAA-rated bonds, or invest in stocks meeting certain income, asset size and volatility criteria.
Imagine you're Jamie Dimon and you have to hold reserves against trading losses or you're Mark Zuckerberg and you've got to build up a large legal settlement fund for the Facebook IPO.
Or, perhaps you're Tim Cook of Apple and you're sitting on $110 billion in cash for future investments.
Chances are you're going to want to buy things that are as close to risk-free as possible to ensure your assets hold their value.
A year ago, you could choose from eight currencies in the G10 that met internationally accepted "risk-free" ratings criteria as measured by the cost of credit default swaps priced under 100 basis points.
Now, there are only five to choose from. A year from now, there might only be two or three.
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The Dollar Is DONE: Four Ways To Profit As the U.S. Dollar Dies
As a young British banker in the inflation-ridden 1970s, I got used to carrying large amounts of German deutsche marks, Swiss francs and Japanese yen in my wallet - to have some security against the lousy performance of the British pound sterling.
While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.
We've reached that point again. In light of the debt-ceiling debacle in Washington, the U.S. credit-rating downgrade by Standard & Poor's, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.
And I'm going to show you the safest of those safe havens.
The "Pesofication" of the U.S. Dollar
I've dubbed this the "pesofication" of the U.S. dollar.
But we're really talking here about the dollar's long-term demise.
The pesofication of the dollar represents the end of the greenback as a major world currency and figures to be one of the major long-term challenges that we U.S. investors will face.
The dollar's demise was set in motion several years ago. But the greenback's fate was sealed in late April, when U.S. Federal Reserve policymakers had a final chance to take a stand against inflation - and failed to do so.
Let me explain ...
Catalysts for the "Pesofication" of the U.S. DollarFour years ago, I referred to the U.S. greenback as the "Bernanke peso." I coined this term, reasoning that U.S. Federal Reserve Chairman Ben S. Bernanke's decision to cut interest rates even as inflation was accelerating was bound to cause the dollar to lose value at an ever-increasing rate.
My prediction held up for a time, but was then derailed by the little matter of the collapse of the U.S. banking system. However, after the Fed's April 27 meeting, I can report that we're right back on track, and the pesofication of the dollar is progressing with startling rapidity.
That late-April meeting of the central bank's policymaking Federal Open Market Committee (FOMC) was the Fed's best chance to set a new course before its $600 billion "quantitative easing" program is scheduled to end on June 30. (The FOMC meeting scheduled for June 20-21 falls too close to the end of the Fed's quantitative-easing/U.S. Treasury-bond-purchase program for a new policy to be established.)
Bernanke seemed to underscore this by announcing that the central bank would, indeed, stop purchasing Treasury bonds on that date. He also explained that, in his view, the "market effect" of bond purchases is determined by the "stock" of bonds outstanding - as opposed to the "flow" of bonds into and out of the market.
We shall see.
Here's my bet: When the Fed stops buying about $225 billion of the Treasury's $400 billion quarterly funding needs, all hell will break loose in the Treasury bond market. After all, the two largest T-bond buyers are not going to be particularly active this summer: The Bank of Japan (BOJ) will be too busy spending money on that country's reconstruction from the earthquake/tsunami/nuclear power plant accident to be buying much U.S. government debt, while its counterpart in Mainland China - the People's Bank of China - has made it clear that it regards the United States as a pretty dodgy credit risk.
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The Death of the Dollar: Will the Fed Kill the Greenback at Tomorrow's FOMC Meeting?
Months or years from now, when analysts are studying the death of the U.S. dollar, they'll look back and see that the greenback's demise began on a specific day - Wednesday, April 27, 2011.
As in ... tomorrow.
At 12:15 p.m. tomorrow, at the conclusion of a two-day Federal Open Market Committee (FOMC) meeting, we'll find out whether U.S. Federal Reserve Chairman Ben S. Bernanke and his policymaking posse opted for a sharp increase in U.S. interest rates - which appears to me to be the only solution to a looming third-quarter crunch.
Unfortunately, I don't think that Bernanke & Co. will make the needed move.
And without that sharp rate increase tomorrow, investors can look forward to rampant inflation, an evisceration of the U.S. Treasury bond market and - in a worst-case scenario - the death of the dollar.
Let me show you why....
To understand why it's crunch time for the dollar, please read on ...