Both Oars In What’s a dollar worth?

Sep 23, 2011

If there were a billion originals of the “Mona Lisa,” having one would not be very special, would it? So, how much can a dollar be worth if there are trillions upon trillions of them? OK, money is not the same thing as fine art. Still, the value of a currency does change when there is a lot of it. And, there are a lot of dollars out there.

Hedge fund trader John Paulson knew that. Predicting that the U.S. government would keep putting money into the market, he bet against the value of the U.S. dollar. He also bet against subprime mortgages in 2007. On account of his foresight, he has made billions—over $5 billion in 2010 alone. He led the list of the top 25 hedge fund managers who collectively made over $22 billion last year.  

Paulson’s joy must have been a bit muted since he knows better than anyone that a billion dollars isn’t what it used to be. But, he still has a lot of them. Even if it may soon take a wheelbarrow full of dollars to buy a gallon of milk, he still has truckloads. In fact, he has made enough in two years to allow him to spend roughly $275,000 a day for the next 100 years. He will be able to afford a $3,750 latte, if that day should arrive.

It would be easy to get a bit angry (maybe more than a bit) upon hearing that Paulson cleaned up for a second time, especially given the mess we are in. But that would be futile and a bit disingenuous. His bet did not make the economy crash—we did. And by “we,” I mean everybody: Washington, the Fed, real estate developers, home buyers, presidents, bankers, senators and representatives, consumers and credit card enthusiasts—all of us.

Rather than get angry or lost in a philosophical debate about whether one man should end up with a windfall equivalent to the life-earnings of 3,200 commercial electricians, I would suggest studying Paulson. His game films are the important ones.

Paulson’s actions are not hidden from the market. It is clear that he bought gold in classic hedge trade against the dollar. He understood that the U.S. government could artificially control the interest rate markets—at least for a time. But, no one can control all aspects of the economy. The market always compensates. This time it did so through the quiet, consistent devaluation of the U.S. dollar.

And how the dollar has devalued! It has plummeted in value against other currencies, and it has devalued relative to commodities, especially the ones we eat and use for construction. Depending on the measuring stick you use, and how far back you go, the dollar appears to have lost from 30 to 85 percent of its value.

The clearest proof that the dollar has lost value is the run up in gold. Clearly, something other than simple inflation is afoot when gold outstrips oil and all other commodity prices. It is not demand that has made things more expensive this time—it is our falling dollar.

A side note: if the devaluation of the dollar has been wholly, or even in part, the result of U.S. monetary policy, it can be considered an indirect tax on all those who held dollar-denominated assets, such as U.S. stocks, cash and real estate. This does not change the need for tax reform. However, it should dampen vitriol against the rich and allow us to focus on asking everyone to pay more taxes.

Why point out what has happened to the dollar? Why bring up old news about Paulson’s and other hedge traders’ immense profits? Isn’t this just rubbing salt into wounds? Not really. When it comes to the economy, the best view is an objective view. The economy and nature are both uncontrollable. It is time we learn from someone who knew when to batten down the hatches.

Even though Paulson has been losing on his latest bet, I would still like to hear from him and his 24 colleagues. I suggest a nationally televised panel, not a congressional inquisition—just a panel of experts discussing the actual economy and what the dollar is really worth. 

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