Wednesday, January 30, 2008

The Strong Dollar Fairy Tale

Marketwatch has an interesting story about the difference between the words and actions of U.S. policy makers. U.S. policymakers claim to want a strong dollar, yet they do everything they can in practice in order to make it weaker. The Federal Reserve is arguably the most inflationist (and Keynesian)of all western central banks and so constantly debase the value of the dollar, and the Bush administration have of course increased budget deficits, with the latest "stimulus package" being just one example.

So, why do they claim they want a strong dollar when they in practice do everything they can to make it weaker? The answer is simply that they want to screw foreign investors and fool them into buying U.S. government bonds and that way get their money and "pay them back" with a negative real interest rate. The only mystery is why foreign investors keep falling for that lie (or fairy tale as marketwatch call it. I don't think the distinction is meaningful here since you are lying if you try to make someone believe that a fairy tale is true), given the historical record of negative real interest rates and constantly depreciating dollar, and the obvious attempts by Helicopter Bernanke to accelerate inflation further.


Anonymous newson said...

far from swallowing the fed's strong dollar rhetoric, i think the people's bank of china and the boj have their own clear-eyed, mercantilistic reasons for buying us tbonds - keeping their currencies cheap.
i think the language is pitched at the domestic public - whistling past the graveyard.

5:29 AM  
Blogger goran said...

Now the dollar is rising anyhow.
Up from a bullish double-bottom among extremely bearish sentiment.

The reason is, among other things, that ECB is going to "ease" and that will put pressure on the Euro.

Also, in previous international recessions, the dollar has acted as a safe haven currency.

Also, the dollar had already fallen for seven years.

There are an immense short-covering potential in the dollar.
Speculators will be forced to "cover" = buy back the dollars they have sold. This will of course lead to a rising dollar.

9:26 AM  
Blogger stefankarlsson said...

Göran, I don't think the ECB will ease anytime soon and even if they do, they will ease a lot less than the Fed, meaning that the interest rate gap will become even more favorable for the euro.

As for safe haven status, the dollar have lost that. And for really good reasons as the U.S. is the most inflationist among all industrialized countries.

And while the dollar has fallen in recent years, it hasn't fallen anywhere near the magnitude it needs to fall. With the fundamentals deteriorating rapidly, the latest correction will prove to be temporary and people like you who fail to see that will lose a lot of money.

4:31 PM  

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