Currency Inflation Is All Relative

Last night after I got back from teaching my class which is now called "Revolutionomics" in the curriculum, I met up with a currency sales trader for a drink. You realize, of course, the carry trade and inflation were two topics that had to come up, right?

I have a new theory about inflation being understated. We've all read about the concept of hedonics and the other totally subjective and antiquated manipulations that our government puts on the economic data they collect and publish. Indeed, I've ranted on the topic myself more than a few times over the years.

But as people often point out, when one currency is being inflated, whether acknowledged by our government or not, that currency will usually fall in relation to other currencies. For example, our domestic fiat currency has been devalued by dozens of percentage points vs. the European fiat currency over the last year as our central bank and federal government have been rather loose with the amount of liquidity they've pumped into the system.

That collapse in the value of the dollar relative to the Euro reflects the market's thoughts that the inflation in our system is probably higher than the inflation in the European system.

Notice that all this analysis is centered on relative inflation, that is, one fiat currency's inflation as compared to another.

The fact is, though, that the value of the fiat European currency is also being undermined by inflation being understated by the EU. So even if our fiat currency is falling in relation to the European fiat currency, if all the world's central banks are profligate in their policies and understating inflation, then the relative value of our currencies to each other will end up being meaningless over time because all the world's fiat currencies will devalue relative to real currencies, such as gold or oil.

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Cody Willard is the manager of CL Willard Capital Management, LLC. He is a regular guest on Fox News, CNBC and other networks, and he writes a monthly column for the Financial Times. He is also an adjunct professor at Seton Hall University and the author of TheCodyReport.net, a monthly stock market newsletter. Willard appreciates your feedback -- click here to send him an email.