Ever since Robert Rubin began the tradition in the
mid-1990s, it has been a significant element of the Treasury Secretary’s
job description to continuously state that a strong dollar is in the national
interest. It is widely regarded that such utterances, if repeated often
enough, can constitute the sum total of what is still laughingly
known as the nation’s “strong dollar policy.”
Over the past two generations, the American
government has launched many
failed campaigns. To name just a few, there has been the war on drugs, the
war on poverty, and the continued attempts to improve education. But the
strong dollar policy must be seen as the poster child for all failed Federal
policies. However, many in the market took cheer that the policy is now being
greatly expanded. In an unprecedented move, the Fed Chairman is now adding
his voice to the chorus and using the same rhetoric previously used by
Treasury alone. That’s two people saying the words…not just one.
A double barrel strong dollar policy!
As the administration is so fond of saying, a
nation’s currency reflects the underlying strength of its economy, and
in that sense can be seen as a nation’s economic report card. In truth,
a strong currency is in the interest of every nation, just as good grades are
in the interest of every student. Using this basic analogy, a flunking
student cannot improve his grades by simply telling his parents, teachers,
and fellow students that he has adopted a “straight A policy.” If
his words are not accompanied by a change in actual behavior,
whereby he stops cutting class, and starts studying more, his new policy is
unlikely to achieve results. So long as his bad habits persist, the policy
will not be any more effective simply because
one of his friends chimes in.
In his speech this past Tuesday, Ben Bernanke finally admitted that the weakness in the dollar
was contributing to both higher inflation and elevated inflation
expectations. This stands in stark contrast to his recent testimony in
front of the House Banking Committee, where in response to a question asked
by Congressman Ron Paul, he
confidently declared that the weakness of the dollar only effected Americans
who travel abroad. It is amazing how little attention this complete reversal
received.
The media of course wasted no time in declaring that
Bernanke’s speech heralded the opening of a
new front in the campaign against the falling dollar. For example,
CNBC’s Larry Kudlow proclaimed that Bernanke had endorsed “King Dollar” (someone
needs to remind Kudlow that the king has long since
abdicated his throne) and the network ran an entire segment on how to profit
from the new dollar rally. All of this because
Bernanke merely mentioned the dollar, acknowledged
its effects on inflation, and expressed concern for its plight. As far as the
media and Wall Street are concerned, words without action are enough. Too bad
that’s not the way things work here on the planet Earth.
The real take away from Bernanke’s
comment is not that the dollar is about to rally, but that it is now more
likely to sink even lower. I believe the main reason Bernanke has refrained from mentioning the dollar in the
past is that he did not want to be put in a position of actually having to do
something about its decline. He is now so fearful of an imminent dollar
collapse that he must have felt compelled to throw down the gauntlet despite his fear that someone might
actually pick it up.
My guess is that currency traders will ultimately
see this as an act of desperation. When the dollar keeps falling a chorus
will swell to demand that the Fed put teeth in its new policy. If Bernanke does nothing the world will finally see a naked
emperor and the dollar’s decline will turn into a rout. If, on
the other hand, the Fed raises rates to defend the dollar, and only a short
term bounce results, then all remaining confidence in the Fed’s ability
to support the dollar will evaporate as well. This is probably Bernanke’s greatest fear and is likely the main
reason he waited so long before mentioning the dollar. The fact that he
felt compelled to do so now likely means he knows the game is coming to an end.
Got gold?
Peter
D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA
92660
Toll-free:
888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of
the tenuous position of the American economy, the housing and mortgage
markets, and U.S. dollar denominated investments, read my new book "Crash
Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
More importantly take action to
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