Tuesday, October 20, 2009
Malpass on the Dollar
"If you want to know why the dollar has been falling this week and gold hit a new high, look no further than the weak jobs numbers last Friday and the weak communique issued over the weekend at the G-7 meeting in Istanbul. ... At 9.8% unemployment convinced markets that monetary policy will remain loose regardless of dollar weakness. ... Bill Gross [said], 'One of the ways a country gets out from under its debt burden in to devalue.' ... Gold, oil the euro and equities are all rising as much as the dollar declines. They stay even in value terms and create lots of trading volume. ... Investors have been playing this weak-dollar trade for years, diverting more and more dollars into commodities, foreign currencies and foreign stock markets. This is the Third-World way of asset allocation. ... Corporations play this game for bigger stakes, borrowing billions in dollars to expand their foreign businesses. As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad. Though British equties rose in pound terms, they generally underperformed gold and foreign equities. ... Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency temrs to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create. This was the lesson on the British malaise, the Carter malaizse, the Mexican malaise of the 1990s, Yeltsin's Russian malaise through 1999 and the rest. No countries have devalued their way into prosperity", David Malpass at the WSJ, 8 October 2009, link: http://online.wsj.com/article/SB10001424052748703298004574458923186941870.html.
I agree with Malpass. Current Fed policy is insane. Except for Wall Steet and the TBTF banks.