The Decline of the Dollar

LewRockwell.com's Michael S. Rozeff shares his theory on why the dollar declined:

The value of bank assets fell when the mortgages went bad and housing prices declined. That meant that the assets backing the bank liabilities lost value, and those liabilities include bank deposits or MONEY. As the assets lost value, so did the value of the dollars on the other side of the balance sheet. (The value of assets must equal the value of liabilities + value of capital.)

The Fed did not inflate the money supply during this period. That did not cause the loss in value of the dollar. This loss in value was not a quantity-theory phenomenon. Instead, as the value of the assets backing the dollar declined, so the value of the dollar declined. Even though we have a fiat money system, the dollars that the banks create are matched by the loans they make. They try to make good loans, but in this episode they failed.

Can we look forward to a recovery soon?

The dollar won't recover until the U.S. economy itself recovers and begins producing returns and wealth, because these are the real backing of the dollars in circulation. A reduction in war-making would help the dollar because the resources would then be turned to more productive outlets. Any reduction in the size of government will help the dollar. However, under Obama, that is not at all likely. We will have to wait for a natural recovery of the economy.

So, probably not.