Thursday, 20 September 2007

Plate Tectonics!

Continents change as the tectonic plates on which they rest shift around. The results are earthquakes, volcanic eruptions, and the creation of mountian ranges. The global economy is a bit like this.

As the locus of economic and political power changes its centre of gravity, so there will be economic earthquakes, financial volcanoes will blow, and new political mountain ranges will form.

In practical terms, whilst there may be the occasional bout of turbulence in the financial markets, most of the effects will be slow, gradual, and prolonged. For example, it could be argued that the current value of the dollar contains a 'hyper-puissance' premium that is draining away from the US. The more that the ineffectiveness of US foreign policy is demonstrated in Iraq, the greater will be the reductions in that premium.

There is an interesting piece in The Economist this week (see article) that examines the effect of a constantly depreciating dollar. If our view is correct, then the US dollar is over-valued at the moment, and further depreciations ought to be expected in the near future.

2 comments:

David Wozney said...

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as having the value of 1/42.2222 fine troy ounces of gold.

Stephen Aguilar-Millan said...

Thank you for that clarification David.