The Fed "Gets It"

"Back in December 2002, one dollar equaled one euro. But that exchange rate didn't last. The dollar was on its way down, a trend that had started more than a year earlier, and has lasted, with occasional oscillations, to this day. ... In Europe, the price of oil has risen by 50 euros in the past five-and-a-half years. ... The sole reason for this enormous difference is the incredible depreciaton of the dollar against the euro. From one for one at the end of 2002, it now costs nearly $1.60 to buy a euro. ... The same old solutions we have heard for years are being proposed--conservation, increased domestic exploration, manipulation of the tax on gasoline. But no one is pointing to what is by far the biggest reason for today's $50 fill-ups. The collapse of the dollar exchange rate, alone, explains at least half of the increase in the pump price of gas over the past five years. If it wasn't for the falling value of the dollar, the price of gasoline wouldn't be an issue. ... Why have we allowed the value of a dollar to fall by half? ... The fact is that the dollar exchange rate is way our of line with the fundamental strength of our economy, and even with such well-known fundamentals as inflation rates. .. We don't need gas tax holidays. We need exchange rate policy", David King (DK) at the WSJ, 23 May 2008.

"In a speech in New Orleans this week, [Donald] Kohn acknowledged soaring oil and food prices, but he blamed them on global supply and demand for corn, oil and so on. ... 'But the prices of commodities have risen substantially in terms of all currencies, not just the dollar. In sum, lower interest rates and the reduced foreign exchange value of the dolar may have played a role in the rise in the prcies of oil and other commodities, but it probably has been a small one.' If Mr. Kohn really believes this, we're in more trouble than we thought. ... When the value of the greenback falls, and especially when speculators anticipate that it will fall further, oil sellers demand more dollars for their product. That was the experience of the 1970s, the last time the Fed lost its monetary moorings, and we have been living through a sequel this decade. ... The central bankers have justified their rapid plunge down the yield curve as necessary to avoid a recession, arguing that a slowing economy would mitigate any inflationary inpact. ... As for inflation, this week's price numbers were alarming. ... With even the Fed's phony 'core inflation' rate well above the 2% federal funds rate, Mr. Kohn and company are running a negative real interest rate policy. ... Yet some at the Fed continue to insisist that inflation expectations are 'well-anchored.' Anchored on what planet? ... Voters are understandably furious because they can see that their real incomes are falling as prices rise", editoral at the WSJ, 23 May 2008.

DK gets it. DK is a "former chief of the New York Federal Reserve's Industrial Economics Division". Apparently, DK's article is the Fed's way of letting us know, the Fed understands what's going on. I await Helicopter Ben's appearing in front of Congress to explain the effects of the dollar's fall on oil's price. As to "no one" pointing to the dollar collapse, I have, see my 7 January 2008 post. Jeffrey Currie of Goldman Sachs is getting close, my 9 May 2008 post. How the US can have "an exchange rate policy" and support Wall Street at the same time is beyond me. We destroy the dollar or the banks, see my 15 December 2007 post.

The WSJ proclaims the "core inflation rate" phony. Thank you. Is Kohn stupid or venal? Is he incapable of seeing the relative increases in the dollar price of commodities compared say, to the euro price? Who is Kohn? A guy with a PhD from the University of Michigan. Aren't we impressed? Yes, but unfavorably. We are not amused either.