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.


Anonymous said...

Skeptical CPA, we need a book explaining the underhanded way our wealth is stolen by the unethical. You are the perfect person to do it.

Anonymous said...

And the Fedsters down on Liberty Street have become the biggest prop traders of all.

Except it's our capital they are blasting around.

They keep forgetting Americanus Consumptivous already has a garage, den, basement, attic and bonus room full of junk and a massive debt.

So now what? The Japan Zombie Model? Slog along for 10-20 years in a stupor?

How about some Senator creating some heat for BenBen's reconfirmation? And shaking down the Fed. And cutting loose the team on Liberty Street? And removing the Fed from prop trading?

That would be change that I can believe in.

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Mike said...

I think that until the government sets out a plan to deal with the fundamental structural problems in our financial system of too much debt and not enough savings and capital, we will not have a sustainable recovery. So while the stock market can stay irrational in the shorter term, in the long run I believe it will go back to reflecting the fundamentals of our boom and bust economy. And that's why I continue to feel that for most people it is safer to remain in cash and gold. In my view the gold price will continue to rise due to a lack of faith in central banks' policies and in fiat currencies. I recently read some very interesting articles on these topics at http://www.goldalert.com/, which discuss the relationship between the dollar, the gold price, and gold mining companies given the Federal Reserve's monetary policies. I thought the article titled "Gold Price Up, Dollar Down - Does it Really Matter?" was particularly useful for investors to read to get a better sense of the relationship between these asset classes, and to get an understanding of the consequences of all the money printing and its potential effects on the dollar.

Independent Accountant said...

Anonymous 1:

Thanks. In 1983 I started writing a book. After I finished two chapters, I found Murray Rothbard's "Mystery of Banking". My book would have been about 90% the same as his, down to the disgrams. If interested, find a copy and read it.