Saturday, June 14, 2008

Helicopter Ben Crashes

Fed "Chairman Ben Bernanke's warning this week about the dollar's steep fall marks the latest step in a Bush administration effort that began in November to use stronger rhetoric to try to prop up the sagging U.S. currency. ... The jawboning marks a shift from just a few months ago, when the Bush administration was seen by many on Wall Street as tacitly approving a weak dollar, which makes U.S. exports more attractive. ... The stepped-up rhetoric comes as the world's economic powers prepare to gather in Japan next week for the Group of Seven meeting. The dollar, along with the U.S. economy, is expected to be a key topic of discussion. ... 'Benign neglect went too far over the past many years,' said Harvard economist Kenneth Rogoff. Policy makers in Washington are 'nervous that there could be another leg down on the dollar,' Mr. Rogoff said, a situation that could exacerbate inflation at home and potentially set off a flight out of dollar assets. The increased focus on the dollar represents somewhat of a gamble by Messrs. Paulson and Bernanke. Their bet is that as the housing crisis subsides and the Fed finishes cutting interest rates, the dollar will climb--making their rhetoric seem like is is having an impact. 'Realistically what has made the most difference is that people now expect the Fed to raise interest rates, or at least not to lower interest rates any more,' said [MIT] economist Kristin Forbes, a former White House adviser. ... Paulson's ... efforts began [in November], when he offered a more vocal defense of the currency by linking it ot the 'long-term strength' of the U.S. Economy. ... In many ways policy makers have no choice but to talk tough on the dollar, said Edwin Truman, a fomer [Fed] official now at the Peterson Institute for International Economics in Washington", my emphasis, WSJ, 5 June 2008.

"Ben Bernanke, in a speech to Harvard's graduating class, drew sharp distinctions between the inflation problem of the 1970s and price surges today. ... Bernanke emphasized differences between the two eras: Overall inflation over the last four quarters, averaging 3.5%, is 'significantly higher than we would like,' but far from the double-digit pace of inflation in the mid-1970s, he said. ... 'Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward,' he said. ... Bernanke also noted that sharply higher productivity growth has been key to the economy's strength over the last decade, helping to heep inflation in check compared to the 1970s", WSJ, 5 June 2008.

"When Paul Volker declared several weeks ago that the world was in a 'dollar crisis,' his successors at the [Fed] made their private disapproval very clear. This week ... Bernanke raised the white flag over Mr. Volker's point by declaring his own public concern 'that the dollar remains a strong and stable currency.' ... The Fed has monopoly power over dollar creation, and concern for its value ought to go without saying. ... The question now is whether the Fed will follow up its new words with action. ... But the Fed chief signaled that he isn't about to tighten monetary policy any time soon because current 'policy seems well positioned to promote moderate growth and price stability over time.' ... The Fed-inspired commodity boom has sent food and energy prices soaring, while wage gains invariably lag. ... The Fed's dollar indifference has sent an inflation shock through those dollar-linked economies. This week alone, we''ve read about price riots in Vietnam, inflation hitting 10.1% in Kuwait, Abu Dhabi contemplatating price or wage controls, South Korean and Indonesian central bankers considering rate hikes, and the Chinese letting the yuan rise ever higher to curb inflationary pressure imported from the U.S. The result has been the largest decline in America's global economic influence since the 1970s. ... Changing the value of the dollar means reducing the supply of, or increasing the demand for, dollars", my emphasis, Editorial at the WSJ, 5 June 2008.

The Fed's assault on the dollar continues unabated. Anyone who believes in Fed "independence" should note the Fed is part of the Bush adminstration. The Fed has "no choice but to talk tough". Got gold? Get more. Rogoff is apparently another economist who doesn't read the newspapers. Hey Rogoff, did you notice the recent prices of: wheat, corn, soybeans, copper, oil, gold, silver, platinum, nickel, lead, iron ore, zinc and natural gas? See my 21 November 2007 post.

Poor Harvard kids, having to hear this nonsense. As for "inflation", it's whatever number Uncle Sam wants it to be. "Productivity" is a residual, less inflation, more productivity.

Ignore anything HB says, see my 9 November 2007 and 27 January 2008 posts.

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