Why the Dollar is Getting Stronger
When people first take an interest in finance (beyond balancing a checking account and buying a few stocks here or there) the first big revelation they have is that paper money is, in and of itself, worthless. Really it's just a piece of paper, not even blank so you can write on it, not even big enough to wrap a fish in.
This quickly leads to the fact that "the governent" (not really but that's the thought) can print up money on a whim, at any given time. This leads to gold fever and the urge to exchange as many pieces of paper for yellow metal as possible. You turn into a hyperinflationista.
I went through this phase, I remember it well.
If you stop your education there, as many people do, the fact that the dollar has been on a tear increasing in value since last fall is perplexing, to put it mildly. The government is spending money like it's going out of style, how's this possible, etc.
I've seen goldbugs go through all types of contortions to try to explain how this is possible while clinging to their um, novel--ah hell, who am I kidding, flat out WRONG--view of the world.
Here's what's really happening:
A dollar is like anything else, it responds to the law of supply and demand. When supply outweighs demand, the value goes down, and vice versa. That's it. Really, there is nothing else in the equation.
Ultimately the demand for dollars comes from the fact that you are forced to accept a dollar in payment for any debt, public or private, at the point of a gun. If you refuse to accept a dollar a judge will force the issue. Government decree: fiat.
This causes the demand for dollars to be a result of the demand for all goods, services, and DEBT INTEREST within the sphere of influence of this government decree, as far as the gun can shoot. This is the demand for dollars (which ARE DEBT).
The supply of dollars is, of course, the total outstanding debt in our economy. All of the credit card balances, mortgages, car loans, government debt, CD's, bonds, and all other kinds of debt, public and private. Taken together, It makes up the supply of dollars.
So the simplest (and correct) explanation for a dollar increasing in value is that the demand for debt is going up and/or the supply of debt is going down. In our case, the supply is RAPIDLY shrinking, while demand has stayed relatively constant. Every time a loan defaults the debt supply shrinks and an angel gets its wings. And new debt to replace it is practically non-existent these days.
That's it.
By the way, if you truly think that the dollar is going down the tubes in the face of a world of data that's screaming otherwise, the best thing you could do is buy indexes. Devaluing the dollar would require an abundance of NEW dollars which will raise the price of everything, including stocks. Leverage up as much as possible because the S&P 500 is going to 5000 as soon as all of this new money is absorbed by the stock markets. You'll be a quadrillionaire
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