Thursday, December 27, 2007

Saving "Sergeant Dollar"

"Contrary to what the inflation doves have been telling us, inflation and inflation expectations are not well contained. The dollar's sinking exchange value signaled long ago that monetary policy was too loose, and that inflation would eventually rear its ugly head. ... So what should be done? It's time for the Bush adminstration to put some teeth in its 'strong' dollar rhetoric by encouraging a coordinated, joint intervention by leading central banks to strengthen and put a floor under the U.S. dollar. ... The current weakness in the dollar is cyclical. ... This brings us to China, and all the misplaced concern over its exchange rate. Given the need to make a strong dollar policy credible, it is perverse to bash the one country that has done the most to prevent a dollar free fall". Ronald McKinnon (RM) and Steve Hanke (SH) in the WSJ, 27 December.

How do RM and SH know the "current weakness in the dollar is cyclical"? Are they short say Euros on margin? I have long been a fan of SH, who writes for Forbes. Here, I disagree. The one thing which will strengthen the dollar, is for Helicopter Ben to stop printing more of them. I agree it is perverse to hector China about the renmibi's value when China is the dollar's largest support. That the dollar needs to be rescued shows how weak it is.

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