The Obama administration is going to have to make a decision soon…is it going to try and commit to a program that will actually do something for banking and other financial institutions or is it going to extend the waffling on this issue that began last fall?
People in the administration say that something has to be done…and it has to be done fast…but, there is this problem about buying assets from these troubled institutions…we don’t know what price we should pay for them.
All I can advise them in terms of setting prices is…do the very best you can…at this moment in time! Yes, there is great uncertainty as to the prices of many or most of these assets…but, that is not the issue at this stage of the game.
Beginning in December 2007, things changed in Washington, D. C. The Federal Reserve System did something that had never been done before. It innovated! It created the Term Auction Facility; it introduced a dollar swap facility with other central banks around the world; as well as the Primary Dealer credit facility. Since that time the Fed has developed several other new ways to put dollars into the banking system.
In March 2008, the Fed and the Treasury engineered the Bear Stearns takeover and in September 2008 the world changed even more as Lehman Brothers was allowed to fail and AIG was essentially nationalized. The American model of financial markets and institutions would never be the same again.
And, things continued on from there with the $700 billion bailout bill passed by Congress and the efforts of Treasury Secretary Paulson and Fed Chairman Bernanke to sooth markets and get credit flowing once again.
The Obama administration has taken over from Bush43 and argued that with the crisis at hand…something must be done to avoid a “catastrophe”…in the words of President Obama himself.
My point is…it is not time to waffle on trying to save the banking and financial system from the bad assets they have on the books.
The government IS involved…up to its neck and beyond! The Obama stimulus package is an attempt to stimulate the economy. But, in my estimation, it will not do a lot. If the current size of the package is, being generous, around $850 billion and the multiplier of this spending is between 0.4 and 0.6 (see my post of January 26, 2009, http://seekingalpha.com/article/116414-what-will-be-the-impact-of-obama-s-stimulus-plan) then the effect on the economy will be between $340 billion and $510 billion of additional output. Not a great “bang-for-the-buck”, but, we are told, it is the effort that is so important at this particular moment.
There will be more to come…promises the Obama administration. Additional programs need to follow this package. More dollars need to be thrown at the problem.
Still, there is the problem of bad assets. What is going to be done with all the toxic waste that is now held by our financial institutions?
Well, since there is way too much debt in the financial system, there could be a massive write down of assets…the banks and other financial institutions absorbing the hair cut. (See my post of February 4, 2009, http://seekingalpha.com/article/118475-two-painful-proposals-to-reduce-our-excess-debt.) At this stage of the effort there does not seem to be a lot of interest in this approach so we probably should put this idea on the back burner for another time.
Thus, if something has to be done…along with the $850 billion stimulus plan…let the Federal Government buy these toxic assets from the banks and other financial institutions. Many estimates place the difference between what these institutions value the assets on their books and the price that the Federal Government would buy them at is a minimum of $2.0 trillion. If the banks and other financial institutions took this kind of a hit to their balance sheets…many of the organizations would be bankrupt…kaput…out-of-business.
My question to this is…aren’t they bankrupt…kaput…out-of-business…already?
The issue is that many of these institutions are large…would require a lot of management talent to run them…and what about the shareholders? Well, the shareholders have no rights…because there is no equity left in these institutions. Let us recognize this and get on with it. Many of these institutions are large…which means there is a major need for management talent. But…why should the managements that got these institutions into the positions they now are in be expected to get them straightened out and healthy again?
This reminds me of many of the “dog-and-pony shows” that I observed during the S & L crisis twenty-some years ago. In these “shows” the existing management would get up in front of potential investors and say…”Yes, we have run this bank for the past 20-some years…and, yes, we basically bankrupted the band…but…WE HAVE LEARNED our lessons! Give us $100.0 million so that we can turn this bank around and make it into something you will be proud of!”
In most cases, the potential investors dug into their pockets and forked over the $100.0 million. Few, if any, of the “born again” managements were successful in turning their institutions around. Oh, well…live and learn!
Unfortunately, the same thing seems to be in play here. The managements that got us here claim that they can be the managements that get us back to health again. What did P. T. Barnum say?
A number of these banks and other financial institutions appear to be insolvent…their managements are hanging on by their finger nails…the credit system is not functioning as it might…and the government is dawdling.
Buy the assets. Remove the shareholders…they had their turn to oversee these institutions. Take over these banks…and see that the banks get new top managements. If you are going to do it…then, do it! Cut out the half-fast programs. Postponing government action only creates more uncertainty, and, as we know too well, the market hates uncertainty.
The Obama campaign called for change in Washington, D. C. It said an Obama administration would change things…action would be taken. Well, action needs to be taken. Obama was right the other evening when he said that his administration will be remembered for stopping the economic downturn and getting things moving upwards again…or not. Not much else is going to matter. And, whether or not you agree with the policies and programs that are being presented…and to a large extent I don’t…I do agree with the general feeling that if you are going to fail…or succeed…you will have to do it in a very committed way. Half-measures are bound to fail…if for no other reason than they won’t raise the confidence of the nation.
So, Mr. Obama, come out with a strong plan for taking care of these toxic assets and come out with a strong plan for removing the chaff from the banking system. Half-way measures are not going to resolve the issue because there will still need to be further adjustments sometime down the road. Be strong! All you can do is what you think is best for the country!
Showing posts with label dollar crisis. Show all posts
Showing posts with label dollar crisis. Show all posts
Sunday, February 8, 2009
Friday, December 19, 2008
The Declining Dollar--Continued
Please note that today’s Wall Street Journal carries an editorial that makes exactly the same points concerning the decline in the value of the United States dollar that I made in my post yesterday. I refer to the comments made in “A Dollar Referendum” which can be found at http://online.wsj.com/article/SB122965017184420567.html?mod=todays_us_opinion.
Let me just summarize the points made in the Wall Street Journal article.
First, after the dollar rose earlier in the fall due to the international flight to quality to invest in Treasury securities, the value of the United States dollar has fallen precipitously in December as a result of the recent Fed actions opening the gate to flood the world with dollars.
Second, why should international financial markets have any faith in the Federal Reserve to restore discipline to the markets when it “has proven that it is far better at adding liquidity than removing it”? The editorial then refers to the Fed record in maintaining exceedingly low target interest rates earlier in the 2001 to 2003 period.
Third, the editorial discusses the flow of new United States government debt that will be coming to the market…approximately $1.0 trillion…related to the proposed Obama stimulus plan. The implication is that the monetary thrust of the Fed will basically monetize this debt.
Fourth, the concern is expressed that measures of inflation, such as the consumer price index are lagging indicators, and do not capture the market’s lack of confidence in international financial markets that the Federal Reserve will be restore order once the “deflation” psychology has been defeated. The decline in the value of the United States dollar represents this expectation of market participants.
In the words of the Wall Street Journal editorial: “The dollar’s decline is a warning about the future. Mr. Bernanke’s decision to flood the world with dollars will no doubt succeed in preventing a deflation. What everyone wants to know is whether he also has the fortitude—or even the desire—to prevent a run on the world’s reserve currency.”
Let me just summarize the points made in the Wall Street Journal article.
First, after the dollar rose earlier in the fall due to the international flight to quality to invest in Treasury securities, the value of the United States dollar has fallen precipitously in December as a result of the recent Fed actions opening the gate to flood the world with dollars.
Second, why should international financial markets have any faith in the Federal Reserve to restore discipline to the markets when it “has proven that it is far better at adding liquidity than removing it”? The editorial then refers to the Fed record in maintaining exceedingly low target interest rates earlier in the 2001 to 2003 period.
Third, the editorial discusses the flow of new United States government debt that will be coming to the market…approximately $1.0 trillion…related to the proposed Obama stimulus plan. The implication is that the monetary thrust of the Fed will basically monetize this debt.
Fourth, the concern is expressed that measures of inflation, such as the consumer price index are lagging indicators, and do not capture the market’s lack of confidence in international financial markets that the Federal Reserve will be restore order once the “deflation” psychology has been defeated. The decline in the value of the United States dollar represents this expectation of market participants.
In the words of the Wall Street Journal editorial: “The dollar’s decline is a warning about the future. Mr. Bernanke’s decision to flood the world with dollars will no doubt succeed in preventing a deflation. What everyone wants to know is whether he also has the fortitude—or even the desire—to prevent a run on the world’s reserve currency.”
Thursday, December 18, 2008
The Declining Dollar
The decline in the value of the dollar has gotten increasing headlines since the Federal Reserve Board of Governors released its new monetary policy efforts on Tuesday. Many short run reasons are being given for the recent decline in the value of the dollar, especially against the Euro and the Yen.
The most intriguing explanation for the decline, however, is a longer term reason. In this explanation, analysts argue that the decline in the value of the dollar is just a continuation of the trend which began in early 2002 and continued through until early August 2008.
The story that accompanies this explanation is that a series of events in 2001 and 2002 convinced international markets that the United States government had forfeited any discipline it had established over its fiscal and monetary policies. First, there was the huge Bush (43) tax cut that moved the government’s budget from one of surplus to one of deficit. This was followed by the war on terror and the Iraq invasion which exacerbated the amount of the budget deficit.
In addition to this the Greenspan Federal Reserve cut the target Federal Funds rate to very low levels, around 1% or so, for a period of about two years. Mr. Greenspan’s concern, apparently, was fear of an extended recession following the burst of the dot.com bubble in the stock market. The result was the creation of the housing bubble as well as smaller bubbles in other areas of the economy, including commodity prices.
As a consequence of these actions, massive amounts of debt were created. Fortunately for the United States…at the time…was that over 50% of this debt…both private and public debt…was financed outside of the United States…large amounts being placed in China, India, and the middle east…although as we found out…banks all over the world acquired huge quantities of mortgage-backed debt.
The interesting thing that was learned from this period is that consumer inflation (as measured by the Consumer Price Index) could be kept in check while inflation ran rapid in asset prices (particularly in housing prices and commodity prices at this time). The monetary authorities concentrated on consumer prices and did nothing with respect to asset prices.
The thing is that “self-reinforcing expectations” can get built into asset prices leading to a massive increase of financial leverage. Consumer credit can be expanded for purchases of the items individuals purchase, but this credit expansion cannot match the possibilities for increase that exist as asset prices go up substantially, year-after-year.
Foreign exchange rates capture the relative expectations of people that operate in these markets. The specific ‘relative expectations’ that are relevant here pertain to how market participants judge how the economies of different countries are expected to perform. Performance in this instance relates to the state of the economy, performance of government’s in terms of their conduct of their economic policies, and expected inflation.
In this respect, Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System, has stated that the price of a country’s currency is the most important price in its economy. The value of a country’s currency is, in a real sense, the “grade card” of the country’s economic and monetary policy, relative to the rest of the world.
Thus, as the value of the United States dollar fell more than 40% from early 2002 to August 2008, participants in international financial markets were indicating a belief that the government of the United States was showing little or no discipline over its budget and this was connected with an extremely “loose” monetary policy. To these market participants, the United States would have to “pay the piper”, sooner or later.
As the story continues, when the financial markets fell apart in September, the United States dollar became the “quality” asset in the world and investors flocked to the dollar as they repatriated assets from all over the globe in order to invest in U. S. Treasury securities. As a consequence of this rush to quality the value of the United States dollar rose.
This latter movement has apparently come to an end. There seems to be a number of short-run reasons for the recent decline in the value of the United States dollar…one of them being a move on the part of foreign investors to get back into their own currencies to dress up their year-end balance sheets.
But, there is another reason given for the drop in the value of the dollar and this is connected with the decisions of the Federal Reserve that were announced on Tuesday and the projected rise in the deficit of the federal government. For all intents and purposes, the target Federal Funds rate is now approximately zero. In addition, the Fed said that it would buy financial assets, long term U. S. Treasury issues and mortgage backed bonds and so forth in order to flood the financial markets with liquidity. And, they warned, they will continue to do this for as long as necessary…whatever “necessary” means. On top of this, the Obama team seems to be talking about adding roughly $1.0 trillion in expenditures to the federal budget to get the United States economy going again.
One can easily draw from this the assumption that the world will be flooded with dollars…millions and millions of dollars. How should one react to this in terms of the value of the dollar?
One could argue that this is exactly what world financial markets have been predicting would happen since early in 2002. (They did not, and could not, predict precisely the path of the collapse.) This is exactly the reason why the United States dollar has declined by about 40% since then!
The problem is that there are no “good” decisions left for the United States. This is the dilemma that must be faced when discipline in lost. When one sees the consequences of a lack of discipline, one does what one needs to do in order to get one’s life back in order. Getting discipline back into one’s life is a matter of one step at a time.
In terms of priorities…getting the economy going and avoiding a cumulative collapse is number one. Until this is accomplished, we may just have to see the value of the dollar continue to decline.
The most intriguing explanation for the decline, however, is a longer term reason. In this explanation, analysts argue that the decline in the value of the dollar is just a continuation of the trend which began in early 2002 and continued through until early August 2008.
The story that accompanies this explanation is that a series of events in 2001 and 2002 convinced international markets that the United States government had forfeited any discipline it had established over its fiscal and monetary policies. First, there was the huge Bush (43) tax cut that moved the government’s budget from one of surplus to one of deficit. This was followed by the war on terror and the Iraq invasion which exacerbated the amount of the budget deficit.
In addition to this the Greenspan Federal Reserve cut the target Federal Funds rate to very low levels, around 1% or so, for a period of about two years. Mr. Greenspan’s concern, apparently, was fear of an extended recession following the burst of the dot.com bubble in the stock market. The result was the creation of the housing bubble as well as smaller bubbles in other areas of the economy, including commodity prices.
As a consequence of these actions, massive amounts of debt were created. Fortunately for the United States…at the time…was that over 50% of this debt…both private and public debt…was financed outside of the United States…large amounts being placed in China, India, and the middle east…although as we found out…banks all over the world acquired huge quantities of mortgage-backed debt.
The interesting thing that was learned from this period is that consumer inflation (as measured by the Consumer Price Index) could be kept in check while inflation ran rapid in asset prices (particularly in housing prices and commodity prices at this time). The monetary authorities concentrated on consumer prices and did nothing with respect to asset prices.
The thing is that “self-reinforcing expectations” can get built into asset prices leading to a massive increase of financial leverage. Consumer credit can be expanded for purchases of the items individuals purchase, but this credit expansion cannot match the possibilities for increase that exist as asset prices go up substantially, year-after-year.
Foreign exchange rates capture the relative expectations of people that operate in these markets. The specific ‘relative expectations’ that are relevant here pertain to how market participants judge how the economies of different countries are expected to perform. Performance in this instance relates to the state of the economy, performance of government’s in terms of their conduct of their economic policies, and expected inflation.
In this respect, Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System, has stated that the price of a country’s currency is the most important price in its economy. The value of a country’s currency is, in a real sense, the “grade card” of the country’s economic and monetary policy, relative to the rest of the world.
Thus, as the value of the United States dollar fell more than 40% from early 2002 to August 2008, participants in international financial markets were indicating a belief that the government of the United States was showing little or no discipline over its budget and this was connected with an extremely “loose” monetary policy. To these market participants, the United States would have to “pay the piper”, sooner or later.
As the story continues, when the financial markets fell apart in September, the United States dollar became the “quality” asset in the world and investors flocked to the dollar as they repatriated assets from all over the globe in order to invest in U. S. Treasury securities. As a consequence of this rush to quality the value of the United States dollar rose.
This latter movement has apparently come to an end. There seems to be a number of short-run reasons for the recent decline in the value of the United States dollar…one of them being a move on the part of foreign investors to get back into their own currencies to dress up their year-end balance sheets.
But, there is another reason given for the drop in the value of the dollar and this is connected with the decisions of the Federal Reserve that were announced on Tuesday and the projected rise in the deficit of the federal government. For all intents and purposes, the target Federal Funds rate is now approximately zero. In addition, the Fed said that it would buy financial assets, long term U. S. Treasury issues and mortgage backed bonds and so forth in order to flood the financial markets with liquidity. And, they warned, they will continue to do this for as long as necessary…whatever “necessary” means. On top of this, the Obama team seems to be talking about adding roughly $1.0 trillion in expenditures to the federal budget to get the United States economy going again.
One can easily draw from this the assumption that the world will be flooded with dollars…millions and millions of dollars. How should one react to this in terms of the value of the dollar?
One could argue that this is exactly what world financial markets have been predicting would happen since early in 2002. (They did not, and could not, predict precisely the path of the collapse.) This is exactly the reason why the United States dollar has declined by about 40% since then!
The problem is that there are no “good” decisions left for the United States. This is the dilemma that must be faced when discipline in lost. When one sees the consequences of a lack of discipline, one does what one needs to do in order to get one’s life back in order. Getting discipline back into one’s life is a matter of one step at a time.
In terms of priorities…getting the economy going and avoiding a cumulative collapse is number one. Until this is accomplished, we may just have to see the value of the dollar continue to decline.
Thursday, July 10, 2008
Yes, Greenspan is to blame!
There has been a lot of discussion recently about who is to blame for the current economic and financial situation. I firmly believe that Alan Greenspan cannot be excluded from those that deserve such blame. There is only one question that needs to be asked: who was the Chairman of the Board of Governors of the Federal Reserve System in the period from 2001 until January 31, 2006? Now look at the chart of the exchange rate between the U. S. Dollar and the Euro during this time. (http://research.stlouisfed.org/fred2/series/EXUSEU?cid=95.)
Need I say more?
By the end of 2006 things were beginning to unravel in the rest of the economy. The rest is history.
Greenspan was an expert on the minutiae pertaining to business cycles. He cut his teeth during the time when understanding short term movements in the economy, independent of what was going on in the rest of the world, was the fashion in economic forecasting. Times changed. Greenspan didn’t.
The result:
Substantial dislocation in world and domestic economic and financial markets;
Substantial commodity price inflation; and
The largest sell-off of American assets in the history of the United States. See “Foreign Investors Pile Up More Pieces of Americana,” http://www.nytimes.com/2008/07/10/business/worldbusiness/10wealth.html?_r=1&oref=slogin.
Certainly monetary policy is not the sole cause of the present unpleasantness. The irresponsible fiscal policy of the period cannot be passed over and the failure of the United States government to develop a sound energy policy must also be included in the picture. But, Greenspan cannot be excused from events because of what was happening in the housing market or some other market. This just diverts attention.
The most important price in an economy is the price of its currency in foreign exchange markets. In watching over this price…Greenspan failed miserably.
Need I say more?
By the end of 2006 things were beginning to unravel in the rest of the economy. The rest is history.
Greenspan was an expert on the minutiae pertaining to business cycles. He cut his teeth during the time when understanding short term movements in the economy, independent of what was going on in the rest of the world, was the fashion in economic forecasting. Times changed. Greenspan didn’t.
The result:
Substantial dislocation in world and domestic economic and financial markets;
Substantial commodity price inflation; and
The largest sell-off of American assets in the history of the United States. See “Foreign Investors Pile Up More Pieces of Americana,” http://www.nytimes.com/2008/07/10/business/worldbusiness/10wealth.html?_r=1&oref=slogin.
Certainly monetary policy is not the sole cause of the present unpleasantness. The irresponsible fiscal policy of the period cannot be passed over and the failure of the United States government to develop a sound energy policy must also be included in the picture. But, Greenspan cannot be excused from events because of what was happening in the housing market or some other market. This just diverts attention.
The most important price in an economy is the price of its currency in foreign exchange markets. In watching over this price…Greenspan failed miserably.
Monday, May 12, 2008
Defenses of the Current U. S. dollar policy.
Defenders of the current economic policy of the Bush administration are now surfacing. Apparently, enough concern has been raised to cause a need to defend the status quo. There are two arguments for not changing policy at the present time. First, there is the argument that the value of the dollar has bottomed out along with signs that there could be an upturn. The second argument is that the United States is still too important in the world for the dollar to have to play by the same rules as all other nations. We will present these two defenses in turn.
The argument for the strengthening of the dollar is the growing attention that has been given to the weakness in the dollar over the past six years or so. Some analysts have discerned such concern being expressed in recent speeches of Ben Bernanke. The feeling is that the ‘balance is shifting’ from the emphasis on financial market crisis to greater emphasis being placed on what has been happening in the foreign exchange markets. Just the added attention on the foreign exchange market has given people hope.
Another factor in this glimpse of optimism is what is happening in Europe. Last Thursday, the Bank of England and the European Central Bank left their interest where they were. The concern expressed by these leaders is with inflation and they, the leaders of these banks, stated that ‘their mandate’ is to maintain price stability within their domains. Given the recent rise in the price of oil and other commodities, greater concern is being expressed that inflation could get out-of-hand and the need right now is to keep a lid on price pressures. The underlying theme is that these central banks will do what they have to do in order to fight these inflationary trends...but this could cause an economic slowdown in Europe, taking the pressure off the central banks to further raise rates or even to let them fall.
This, of course, is taken as a hopeful sign by those arguing for the stabilizing of the dollar because it would help to change relative interest rates between Europe and the United States, something that has contributed to the weakness in the dollar. Higher short term interest rates in Europe have drawn investors away from the U. S. during the recent period when the Federal Reserve has been dramatically lowering their target for the Fed Funds rate. In addition, the Federal Reserve Open Market Committee, after their latest meeting, announced that their latest reduction in the Fed Funds target may be the last one…at least for a while. [See the post of May 1, 2008, “Where is the Leadership?” http://maseportfolio.blogspot.com/.] This has been taken as a hopeful sign that the yield differential between Europe and the United States will become more favorable to the United States.
Finally, although not noticed at the time, the finance ministers of the G-7 nations called attention to the problems, including that of the dollar, in international currency markets and stated that they could not ignore these going forward. [See my post “Finance Ministers Concerned with the U. S. Dollar”, of April 13 at the above website.] Analysts have now gone back to this and claimed this to be another piece of evidence that the concern over the decline in the value of the dollar has risen on the agenda of world bankers. This, they argue is just another sign that maybe the decline in the value of the dollar is over and that some rise might be expected in the future.
In terms of the second argument, analysts are arguing that, yes, the dollar has declined in value but we needn’t be overly concerned with the decline because the United States is too important in the world for nations and other investors to ‘dump’ the dollar. The United States, they argue is still a great place for people to invest and, in this respect, will continue to be a haven to world investors in this age of uncertainty and changing technologies. Also, just the fact that the United States possesses the major military machine in the world gives it the ability to continue to pay off its debts. Even though China and India are becoming major economic powers in the world, the United States and the dollar will maintain its position and prevail over other currencies [including the Euro] in the foreseeable future.
Essentially, the argument here is that it is in the best interest of other nations [China and India included] to see that the role of the dollar is maintained. And, as long as the United States and the U. S. dollar serve as the lubricant for world trade, there is plenty of incentive to see that the current system continues to work. Others, like the G-7, will do what they have to do to keep things as they are.
There are several responses I would like to make to these arguments.
First, people seem to forget that the United States had a budget surplus as recently as 2001. Why do we think that fiscal discipline is not a viable alternative?
Second, most of the first argument is based on wishful thinking. There has been talk before by Treasury Secretaries and Federal Reserve Chairman about a strong dollar…but nothing ever came of this. The situation in England and Europe may require higher interest rates before lower rates are considered…and the Federal Reserve has only suggested a pause in the lowering of interest rates here. And, what is the G-7 going to do for the dollar if United States policymakers do not show a real commitment on their part.
Third, no country in the world has considered itself ‘too’ important to ignore the rules that other nations play by. Although a ‘go-it-alone’ attitude has prevailed in Washington, D. C. over the past 7 ½ years, it has already come back to haunt us in many different areas. In the early 1990s, Robert Rubin convinced Bill Clinton that the United States could not afford to be out-of-step with the rest of the world and needed to bring the Federal budget under control. Clinton listened to him and by the time he left office, the United States was, fiscally, in very god shape and the dollar was doing quite well. This strength was recognized in world financial markets. We are a part of the world and can play by the rules that everyone else plays by. We only hurt and isolate ourselves if we consider that we are above the rules.
Will we continue on the path suggested by those arguing for little or no change in United States economic policy? Yes, for at least the short run.
First, we have a lame duck administration. There is nothing dramatic that will be done before a new administration comes into office. All that we can expect is efforts to protect the legacy of the current administration.
Second, there is a question as to whether a new administration will accept the economic and financial realities that exist or will they try and enact legislation reflecting the promises they are making to get elected. Before confidence can be restored in the U. S. government, there must be real commitment on the part of a new administration that market participants in international markets can trust.
Third, there is still the lingering financial uncertainty. How fragile is the financial system at this time and how will continuing economic weakness contribute to any future dislocations? Banks and others seem to be working out their problems in an orderly fashion, but will this continue?
Fourth, how will United States citizens respond to more and more foreign ownership of their physical assets? Sovereign wealth funds and other investors will keep investing their dollars in U. S. companies. The use of these dollars in this way has recently increased every year and there is no reason that this will stop. How will the electorate respond in the future to seeing U. S. firms coming more and more under the control of foreign nations and other foreign interests? Globalization is coming home to America.
Finally, will the United States enact an effective energy policy? This, sadly, is still in the distant future.
The future...the dollar may fluctuate around the current range for a while...but, it seems to me that unless things change, the longer term picture contains more weakness in the dollar's value.
The argument for the strengthening of the dollar is the growing attention that has been given to the weakness in the dollar over the past six years or so. Some analysts have discerned such concern being expressed in recent speeches of Ben Bernanke. The feeling is that the ‘balance is shifting’ from the emphasis on financial market crisis to greater emphasis being placed on what has been happening in the foreign exchange markets. Just the added attention on the foreign exchange market has given people hope.
Another factor in this glimpse of optimism is what is happening in Europe. Last Thursday, the Bank of England and the European Central Bank left their interest where they were. The concern expressed by these leaders is with inflation and they, the leaders of these banks, stated that ‘their mandate’ is to maintain price stability within their domains. Given the recent rise in the price of oil and other commodities, greater concern is being expressed that inflation could get out-of-hand and the need right now is to keep a lid on price pressures. The underlying theme is that these central banks will do what they have to do in order to fight these inflationary trends...but this could cause an economic slowdown in Europe, taking the pressure off the central banks to further raise rates or even to let them fall.
This, of course, is taken as a hopeful sign by those arguing for the stabilizing of the dollar because it would help to change relative interest rates between Europe and the United States, something that has contributed to the weakness in the dollar. Higher short term interest rates in Europe have drawn investors away from the U. S. during the recent period when the Federal Reserve has been dramatically lowering their target for the Fed Funds rate. In addition, the Federal Reserve Open Market Committee, after their latest meeting, announced that their latest reduction in the Fed Funds target may be the last one…at least for a while. [See the post of May 1, 2008, “Where is the Leadership?” http://maseportfolio.blogspot.com/.] This has been taken as a hopeful sign that the yield differential between Europe and the United States will become more favorable to the United States.
Finally, although not noticed at the time, the finance ministers of the G-7 nations called attention to the problems, including that of the dollar, in international currency markets and stated that they could not ignore these going forward. [See my post “Finance Ministers Concerned with the U. S. Dollar”, of April 13 at the above website.] Analysts have now gone back to this and claimed this to be another piece of evidence that the concern over the decline in the value of the dollar has risen on the agenda of world bankers. This, they argue is just another sign that maybe the decline in the value of the dollar is over and that some rise might be expected in the future.
In terms of the second argument, analysts are arguing that, yes, the dollar has declined in value but we needn’t be overly concerned with the decline because the United States is too important in the world for nations and other investors to ‘dump’ the dollar. The United States, they argue is still a great place for people to invest and, in this respect, will continue to be a haven to world investors in this age of uncertainty and changing technologies. Also, just the fact that the United States possesses the major military machine in the world gives it the ability to continue to pay off its debts. Even though China and India are becoming major economic powers in the world, the United States and the dollar will maintain its position and prevail over other currencies [including the Euro] in the foreseeable future.
Essentially, the argument here is that it is in the best interest of other nations [China and India included] to see that the role of the dollar is maintained. And, as long as the United States and the U. S. dollar serve as the lubricant for world trade, there is plenty of incentive to see that the current system continues to work. Others, like the G-7, will do what they have to do to keep things as they are.
There are several responses I would like to make to these arguments.
First, people seem to forget that the United States had a budget surplus as recently as 2001. Why do we think that fiscal discipline is not a viable alternative?
Second, most of the first argument is based on wishful thinking. There has been talk before by Treasury Secretaries and Federal Reserve Chairman about a strong dollar…but nothing ever came of this. The situation in England and Europe may require higher interest rates before lower rates are considered…and the Federal Reserve has only suggested a pause in the lowering of interest rates here. And, what is the G-7 going to do for the dollar if United States policymakers do not show a real commitment on their part.
Third, no country in the world has considered itself ‘too’ important to ignore the rules that other nations play by. Although a ‘go-it-alone’ attitude has prevailed in Washington, D. C. over the past 7 ½ years, it has already come back to haunt us in many different areas. In the early 1990s, Robert Rubin convinced Bill Clinton that the United States could not afford to be out-of-step with the rest of the world and needed to bring the Federal budget under control. Clinton listened to him and by the time he left office, the United States was, fiscally, in very god shape and the dollar was doing quite well. This strength was recognized in world financial markets. We are a part of the world and can play by the rules that everyone else plays by. We only hurt and isolate ourselves if we consider that we are above the rules.
Will we continue on the path suggested by those arguing for little or no change in United States economic policy? Yes, for at least the short run.
First, we have a lame duck administration. There is nothing dramatic that will be done before a new administration comes into office. All that we can expect is efforts to protect the legacy of the current administration.
Second, there is a question as to whether a new administration will accept the economic and financial realities that exist or will they try and enact legislation reflecting the promises they are making to get elected. Before confidence can be restored in the U. S. government, there must be real commitment on the part of a new administration that market participants in international markets can trust.
Third, there is still the lingering financial uncertainty. How fragile is the financial system at this time and how will continuing economic weakness contribute to any future dislocations? Banks and others seem to be working out their problems in an orderly fashion, but will this continue?
Fourth, how will United States citizens respond to more and more foreign ownership of their physical assets? Sovereign wealth funds and other investors will keep investing their dollars in U. S. companies. The use of these dollars in this way has recently increased every year and there is no reason that this will stop. How will the electorate respond in the future to seeing U. S. firms coming more and more under the control of foreign nations and other foreign interests? Globalization is coming home to America.
Finally, will the United States enact an effective energy policy? This, sadly, is still in the distant future.
The future...the dollar may fluctuate around the current range for a while...but, it seems to me that unless things change, the longer term picture contains more weakness in the dollar's value.
Monday, April 14, 2008
Is it Time to Focus on the Value of the Dollar?
Critics of John Maynard Keynes have charged the great man with changing his mind too often. They said that he could not maintain a position for an extended period of time. Keynes countered this criticism with the remark: “When the situation changes, I change my mind. What do you do?”
It seems to me that it is time for Keynesians, and others, to change their minds with respect to policy prescriptions pertaining to employment and the value of the dollar. In this highly integrated world, countries cannot conduct their monetary and fiscal policies independently of one another as the United States has been attempting to do in recent years and did for most of the latter part of the 20th century. The basic philosophy behind this effort is the desire for a county to achieve low rates of unemployment independently of what monetary and fiscal policies are being followed in any other country.
I am not arguing that we should not be in favor of low unemployment. It is just that the philosophy supporting current thinking in the United States emphasizes this one goal over any other and is captured in both The Employment Act of 1946 and the so-called Humphrey-Hawkins Full Employment Act of 1978. There is a long history preceding these “acts” and this history needs to be reviewed to put the current situation into a proper perspective. A good reference is the book by Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace.” (Oxford University Press, 2006)
We pick up the story around 1919 at the Paris Peace Conference. Historically, Keynes had taught and written about the Purchasing Power Parity theory of relative foreign exchange values and had been in favor of flexible foreign exchange rates. However, given the events taking place in the second decade of the 20th century, he changed his mind about how the world economy should be set up in order to save capitalism. At the peace conference, Keynes became a very vocal advocate for fixed exchange rates which would allow countries to seek high rates of employment within their own borders and do this independently of other countries. He worked very hard, both theoretically and practically, to devise a system of exchange rates in which this national independence could be achieved.
The reason for this change of mind was the unrest the Western nations were feeling concerning recent events in Russia and the growing support for the ideas of Marx and Engels. In particular, the Communist movement was gaining ground in most of Europe and the Russian Revolution cemented the idea that a Bolshevik uprising could actually take place. There were legitimate fears that the working classes, if unhappy enough, could rise up and gain control of a nation’s government. This concern supplied the rationale for attempting to develop governmental policies that would help to ensure that a country achieved and then maintained low rates of unemployment. The old ideas had to be revised in the light of new events and new information. The situation had changed so Keynes changed his mind.
Keynes worked for the next twenty-five years or so to create such a system. His efforts were directed along three different paths. First, he attempted to develop the philosophical and scientific foundation for this new way to look at economic policy making. Second, he conducted an almost continuous campaign in the popular press, newspapers and magazines, in an attempt to educate the public along the lines he was thinking as well as to advocate policies. Third, when asked, he devoted time and energy toward the actual creation of such a system; a system that would achieve the integrated world for which he hoped.
The philosophical and scientific work that he did resulted in the publication of his masterpiece, “The General Theory of Employment, Interest, and Money.” This book became the basis for what became known as Keynesian Economics and provided the intellectual rationale in the United States for the passage of The Employment Act of 1946. The Bretton Woods Conference, which began in 1944, produced the world financial system that incorporated much of what Keynes wanted. He was very active in this conference and, in fact, dominated the result. The system included fixed foreign exchange rates that would or could be changed over time as was required. This basis became the operational standard for the world during the next 30-40 years. It was thought that this system “freed-up” national governments so that they could pursue economic policies aimed at full employment in a relatively independent fashion.
Actually, the next 30-40 years saw the system set up at Bretton Woods slowly unravel. The reason…no country could really isolate their economic policies from the economic policies of other countries. The calm of the fixed foreign exchange rate regime was continually punctuated by periodic re-adjustments that had to be made when the currency of a country had to be devalued. The devaluation usually took place after pressure built up on the currency while, at the same time, the government denied that they were going to devalue and the central bank and treasury of the country valiantly made efforts to shore up the value of the currency. Finally, the pressures became so great that the currency had to be devalued.
In the 1960s in the United States, inflation became an issue as the Johnson administration mismanaged the government’s fiscal affairs attempting to pay for both ‘guns and butter’. This era ended as the Nixon administration ‘froze’ wages and prices in 1971 in an effort to gain control over inflation. This government also set free the dollar price of gold (which had been set at $35 per ounce) and let the dollar float in foreign exchange markets. And, as they say, the rest is history.
After this, country after country came up against the inflation dragon as the world continued to give preference in their economic policies to the goal of full employment. Yet, country after country found that they could not independently follow this kind of policy and maintain a strong currency. Country after country came to realize that they must get their fiscal budget under control and make their central bank independent of the central government so that it could follow a policy based upon controlling inflation. More and more central banks adopted ‘inflation targeting’ as their operating goal so as to achieve creditability and trust in world financial markets.
The United States has resisted this trend. As a dying gasp, the Congress enacted the Humphrey-Hawkins Full Employment Act in 1978, but this soon had to be put aside as the Carter administration was forced to confront renewed inflationary pressures and bring in Paul Volcker to lead the Federal Reserve and bring inflation under control. Once inflation was brought under control and some discipline was re-established over the conduct of monetary policy, economic growth was renewed and high levels of employment were attained. With inflation not an issue, businesses tended to concentrate on productivity and not on how to protect themselves from inflation. The unemployment rate dropped to period lows.
However, high employment has continued to be a goal of many politician and intellectuals within the United States. There has been reluctance to establish ‘inflation targeting in the U. S. Every wiggle in the unemployment rate brings cries for new and more effective government stimulus to ensure a low unemployment rate. Yet, reality continues to put holes in the arguments given to support governmental efforts to achieve such a goal. The times are not what they once were. As the times have changed, the politicians and intellectuals that continue to supports such goals need to change their minds.
The United States cannot ‘go-it-alone’. The United States must join the rest of the world and give more attention to the value of the dollar and less to immediate unemployment goals. The ‘revolt of the masses’ is not the threat it was in the 1920s and 1930s (although food issues, particularly in Asia, Africa and Latin America, may have taken over). And, as we saw in the 1990s, fiscal discipline and a non-inflationary monetary policy focused on a strong U. S. dollar, coupled with policies that support private innovation and change, can produce not only low inflation but high employment. It is my belief that Keynes, in the present world environment, would be more supportive of this kind of policy than a ‘Keynesian’ policy based upon achieving full employment, whatever that is. It is time for others to change their minds as well.
It seems to me that it is time for Keynesians, and others, to change their minds with respect to policy prescriptions pertaining to employment and the value of the dollar. In this highly integrated world, countries cannot conduct their monetary and fiscal policies independently of one another as the United States has been attempting to do in recent years and did for most of the latter part of the 20th century. The basic philosophy behind this effort is the desire for a county to achieve low rates of unemployment independently of what monetary and fiscal policies are being followed in any other country.
I am not arguing that we should not be in favor of low unemployment. It is just that the philosophy supporting current thinking in the United States emphasizes this one goal over any other and is captured in both The Employment Act of 1946 and the so-called Humphrey-Hawkins Full Employment Act of 1978. There is a long history preceding these “acts” and this history needs to be reviewed to put the current situation into a proper perspective. A good reference is the book by Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace.” (Oxford University Press, 2006)
We pick up the story around 1919 at the Paris Peace Conference. Historically, Keynes had taught and written about the Purchasing Power Parity theory of relative foreign exchange values and had been in favor of flexible foreign exchange rates. However, given the events taking place in the second decade of the 20th century, he changed his mind about how the world economy should be set up in order to save capitalism. At the peace conference, Keynes became a very vocal advocate for fixed exchange rates which would allow countries to seek high rates of employment within their own borders and do this independently of other countries. He worked very hard, both theoretically and practically, to devise a system of exchange rates in which this national independence could be achieved.
The reason for this change of mind was the unrest the Western nations were feeling concerning recent events in Russia and the growing support for the ideas of Marx and Engels. In particular, the Communist movement was gaining ground in most of Europe and the Russian Revolution cemented the idea that a Bolshevik uprising could actually take place. There were legitimate fears that the working classes, if unhappy enough, could rise up and gain control of a nation’s government. This concern supplied the rationale for attempting to develop governmental policies that would help to ensure that a country achieved and then maintained low rates of unemployment. The old ideas had to be revised in the light of new events and new information. The situation had changed so Keynes changed his mind.
Keynes worked for the next twenty-five years or so to create such a system. His efforts were directed along three different paths. First, he attempted to develop the philosophical and scientific foundation for this new way to look at economic policy making. Second, he conducted an almost continuous campaign in the popular press, newspapers and magazines, in an attempt to educate the public along the lines he was thinking as well as to advocate policies. Third, when asked, he devoted time and energy toward the actual creation of such a system; a system that would achieve the integrated world for which he hoped.
The philosophical and scientific work that he did resulted in the publication of his masterpiece, “The General Theory of Employment, Interest, and Money.” This book became the basis for what became known as Keynesian Economics and provided the intellectual rationale in the United States for the passage of The Employment Act of 1946. The Bretton Woods Conference, which began in 1944, produced the world financial system that incorporated much of what Keynes wanted. He was very active in this conference and, in fact, dominated the result. The system included fixed foreign exchange rates that would or could be changed over time as was required. This basis became the operational standard for the world during the next 30-40 years. It was thought that this system “freed-up” national governments so that they could pursue economic policies aimed at full employment in a relatively independent fashion.
Actually, the next 30-40 years saw the system set up at Bretton Woods slowly unravel. The reason…no country could really isolate their economic policies from the economic policies of other countries. The calm of the fixed foreign exchange rate regime was continually punctuated by periodic re-adjustments that had to be made when the currency of a country had to be devalued. The devaluation usually took place after pressure built up on the currency while, at the same time, the government denied that they were going to devalue and the central bank and treasury of the country valiantly made efforts to shore up the value of the currency. Finally, the pressures became so great that the currency had to be devalued.
In the 1960s in the United States, inflation became an issue as the Johnson administration mismanaged the government’s fiscal affairs attempting to pay for both ‘guns and butter’. This era ended as the Nixon administration ‘froze’ wages and prices in 1971 in an effort to gain control over inflation. This government also set free the dollar price of gold (which had been set at $35 per ounce) and let the dollar float in foreign exchange markets. And, as they say, the rest is history.
After this, country after country came up against the inflation dragon as the world continued to give preference in their economic policies to the goal of full employment. Yet, country after country found that they could not independently follow this kind of policy and maintain a strong currency. Country after country came to realize that they must get their fiscal budget under control and make their central bank independent of the central government so that it could follow a policy based upon controlling inflation. More and more central banks adopted ‘inflation targeting’ as their operating goal so as to achieve creditability and trust in world financial markets.
The United States has resisted this trend. As a dying gasp, the Congress enacted the Humphrey-Hawkins Full Employment Act in 1978, but this soon had to be put aside as the Carter administration was forced to confront renewed inflationary pressures and bring in Paul Volcker to lead the Federal Reserve and bring inflation under control. Once inflation was brought under control and some discipline was re-established over the conduct of monetary policy, economic growth was renewed and high levels of employment were attained. With inflation not an issue, businesses tended to concentrate on productivity and not on how to protect themselves from inflation. The unemployment rate dropped to period lows.
However, high employment has continued to be a goal of many politician and intellectuals within the United States. There has been reluctance to establish ‘inflation targeting in the U. S. Every wiggle in the unemployment rate brings cries for new and more effective government stimulus to ensure a low unemployment rate. Yet, reality continues to put holes in the arguments given to support governmental efforts to achieve such a goal. The times are not what they once were. As the times have changed, the politicians and intellectuals that continue to supports such goals need to change their minds.
The United States cannot ‘go-it-alone’. The United States must join the rest of the world and give more attention to the value of the dollar and less to immediate unemployment goals. The ‘revolt of the masses’ is not the threat it was in the 1920s and 1930s (although food issues, particularly in Asia, Africa and Latin America, may have taken over). And, as we saw in the 1990s, fiscal discipline and a non-inflationary monetary policy focused on a strong U. S. dollar, coupled with policies that support private innovation and change, can produce not only low inflation but high employment. It is my belief that Keynes, in the present world environment, would be more supportive of this kind of policy than a ‘Keynesian’ policy based upon achieving full employment, whatever that is. It is time for others to change their minds as well.
Sunday, April 13, 2008
Finance Ministers Concerned with U. S. Dollar
The G-7 Finance Ministers and Central Bank Governors met in Washington, D. C. this past week and expressed concern over the decline in the value of the dollar. The United States dollar has fallen by about 15% against the Euro over the past year and has fallen by about 8.0% since the end of 2007. Against the yen it has fallen by the same amount over the past twelve months and by almost 10% since the close of 2007. The dollar has fallen by almost 10% against the currencies of major trading partners of the United States in the past year. Over the past six years the dollar has been in almost constant decline against most major currencies and against major U. S. trading blocks. The data all seem to show the same result.
The Group of Seven, generally, is relatively subtle about the statements they make. However, most observers agree that the statement put out by these people last Thursday evening was relatively blunt. The statement reads, “Since our last meeting, there have been sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” They followed this up by saying “We continue to monitor exchange markets closely, and cooperate as appropriate.”
But, what can be done. The possibilities are not very pleasant. The United States can raise interest rates. Or, Europe, and other countries, can lower their interest rates. Or, there can be direct intervention in markets. Although the English lowered rates last week, the European Central Bank has not followed. The English are in the midst of their own housing crisis and felt that they could not go any longer avoid lowering rates. Other central banks are not so willing to lower rates because, world wide there is a fear of setting off inflation again.
Much of the rest of the world has gone through the battle to get inflation under control and realign their fiscal and monetary affairs so as to keep inflation under control. This has meant that governments could not lose control of their fiscal discipline and that central banks had to become independent of the national government. In many cases, central banks pursued inflation targeting in order to establish their credibility and gain the confidence and trust of the global investment community. These countries, once they paid the price to achieve this control and credibility, are not willing to give up what came at such a cost. Other central banks will only reluctantly, if at all, lower their interest rates.
The United States has not conformed to the rest of the world in this respect. There has been little or no discipline established over its fiscal affairs and the Federal Reserve, especially between 2002 and 2005, conducted a policy that seemed anything but independent of the administration in Washington, D. C. There is now little or no confidence in the ability of the leaders in the Bush administration to gain the control necessary to regain fiscal discipline and monetary independence. Any necessary action on the part of Washington is going to have to wait until, at least, there is a new administration sworn in. So, don’t bet on the Federal Reserve raising interest rates in the near term.
What about direct intervention? This may work in the very short run, but the long term consequences of such action is worse than the benefits gained in the short run. These should not be relied upon unless absolutely necessary and then probably not even then.
Sooner or later the United States is going to have to bite-the-bullet and pay for the dislocations it has caused. Like almost every other country in the world, the United States is going to have to pay by the current international rules. America has ‘gone-it-alone’ for almost eight years now, in foreign affairs, as well as in economics and finance. In economics and finance, ultimately you have to pay for the way you have lived. You can only postpone things for so long.
The G-7 Finance Ministers and Central Bank Governors have given the United States a ‘mild’ slap on the hand. But, many financial experts believe that having this issue reach this level is a sign that the rest of the world is tired of the United States doing just what it wants to do. This administration is not going to really do anything about it. The G-7 statement, however, should be taken seriously by everyone of the candidates running for the office of President of the United States.
The Group of Seven, generally, is relatively subtle about the statements they make. However, most observers agree that the statement put out by these people last Thursday evening was relatively blunt. The statement reads, “Since our last meeting, there have been sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” They followed this up by saying “We continue to monitor exchange markets closely, and cooperate as appropriate.”
But, what can be done. The possibilities are not very pleasant. The United States can raise interest rates. Or, Europe, and other countries, can lower their interest rates. Or, there can be direct intervention in markets. Although the English lowered rates last week, the European Central Bank has not followed. The English are in the midst of their own housing crisis and felt that they could not go any longer avoid lowering rates. Other central banks are not so willing to lower rates because, world wide there is a fear of setting off inflation again.
Much of the rest of the world has gone through the battle to get inflation under control and realign their fiscal and monetary affairs so as to keep inflation under control. This has meant that governments could not lose control of their fiscal discipline and that central banks had to become independent of the national government. In many cases, central banks pursued inflation targeting in order to establish their credibility and gain the confidence and trust of the global investment community. These countries, once they paid the price to achieve this control and credibility, are not willing to give up what came at such a cost. Other central banks will only reluctantly, if at all, lower their interest rates.
The United States has not conformed to the rest of the world in this respect. There has been little or no discipline established over its fiscal affairs and the Federal Reserve, especially between 2002 and 2005, conducted a policy that seemed anything but independent of the administration in Washington, D. C. There is now little or no confidence in the ability of the leaders in the Bush administration to gain the control necessary to regain fiscal discipline and monetary independence. Any necessary action on the part of Washington is going to have to wait until, at least, there is a new administration sworn in. So, don’t bet on the Federal Reserve raising interest rates in the near term.
What about direct intervention? This may work in the very short run, but the long term consequences of such action is worse than the benefits gained in the short run. These should not be relied upon unless absolutely necessary and then probably not even then.
Sooner or later the United States is going to have to bite-the-bullet and pay for the dislocations it has caused. Like almost every other country in the world, the United States is going to have to pay by the current international rules. America has ‘gone-it-alone’ for almost eight years now, in foreign affairs, as well as in economics and finance. In economics and finance, ultimately you have to pay for the way you have lived. You can only postpone things for so long.
The G-7 Finance Ministers and Central Bank Governors have given the United States a ‘mild’ slap on the hand. But, many financial experts believe that having this issue reach this level is a sign that the rest of the world is tired of the United States doing just what it wants to do. This administration is not going to really do anything about it. The G-7 statement, however, should be taken seriously by everyone of the candidates running for the office of President of the United States.
Thursday, April 10, 2008
How can you talk about inflation now?
The value of the dollar has been declining for six years!
For six years......
And, all we heard from the Bush administration was that the administration supported a 'strong dollar'.
The Bush government then went off on its own, merry way.
We are just beginning to see the extent of the Bush legacy...and it is not pretty.
The Wall Street Journal headlines this morning: "Inflation, Spanning Globe, Is Set to Reach Decade High"!
In the United States alone, it is estimated that securitized debt rose at a compound annual rate of about 7% for the past sixteen or seventeen years. In addition, the estimated volume of derivatives placed rose at about a 12 % compound annual rate over the same time period. This produced bubbles in asset values, even though inflation rates as represented by the consumer price index did not show much increase. The consumer price index includes rent or as estimate of rental value...it does not include asset prices. Bob Shiller has estimated that the United States has never seen, in the past 150 years or so, a spike in rising housing prices as we have seen in the past eight years! And, the bubble has spilled over into commodities, especially gold and oil.
The Bank of England did cut its key lending rate this morning but the European Central Bank did not move its rate today. Inflation still is the major concern of the ECB...as it is for much of the rest of the world.
The United States is 'out-of-step' with the rest of the world because the Bush administration had to 'go-it-alone' in terms of economic policy...as well as foreign policy. Now, we reap the consequences of this go-it-alone attitude.
Paul Volcker, on Tuesday evening, claimed that we were in a 'dollar crisis'. I believe that he is right and that we, and the next President, will be working to resolve this situation for several years into the future.
For six years......
And, all we heard from the Bush administration was that the administration supported a 'strong dollar'.
The Bush government then went off on its own, merry way.
We are just beginning to see the extent of the Bush legacy...and it is not pretty.
The Wall Street Journal headlines this morning: "Inflation, Spanning Globe, Is Set to Reach Decade High"!
In the United States alone, it is estimated that securitized debt rose at a compound annual rate of about 7% for the past sixteen or seventeen years. In addition, the estimated volume of derivatives placed rose at about a 12 % compound annual rate over the same time period. This produced bubbles in asset values, even though inflation rates as represented by the consumer price index did not show much increase. The consumer price index includes rent or as estimate of rental value...it does not include asset prices. Bob Shiller has estimated that the United States has never seen, in the past 150 years or so, a spike in rising housing prices as we have seen in the past eight years! And, the bubble has spilled over into commodities, especially gold and oil.
The Bank of England did cut its key lending rate this morning but the European Central Bank did not move its rate today. Inflation still is the major concern of the ECB...as it is for much of the rest of the world.
The United States is 'out-of-step' with the rest of the world because the Bush administration had to 'go-it-alone' in terms of economic policy...as well as foreign policy. Now, we reap the consequences of this go-it-alone attitude.
Paul Volcker, on Tuesday evening, claimed that we were in a 'dollar crisis'. I believe that he is right and that we, and the next President, will be working to resolve this situation for several years into the future.
Wednesday, April 9, 2008
Paul Volcker and the "Dollar Crisis"
Paul Volcker gave a speech yesterday. There was no mention of it in the New York Times and the only place the topic was mentioned in the Wall Street Journal was in the lead editorial. Paul Volcker thinks that we are in a "Dollar Crisis." We should all pay attention.
The 'take-aways' from the speech seem to be:
1. The dollar crisis will be with us for a while;
2. The Fed can't ignore the decline in the value of the dollar and just focus on a recession;
3. The Fed can't give in to efforts to solve the housing situation (these efforts are political);
4. The Fed can't sacrifice the 'integrity of the currency" by holding suspect mortgage-backed securities;
5. The Fed can't give away the shop by bailing out investment banks, hedge funds or private equity.
The bottom line is that the Federal Reserve is a central bank and "should be" independent of the political process. That is, the Fed needs to be the Fed!
The 'take-aways' from the speech seem to be:
1. The dollar crisis will be with us for a while;
2. The Fed can't ignore the decline in the value of the dollar and just focus on a recession;
3. The Fed can't give in to efforts to solve the housing situation (these efforts are political);
4. The Fed can't sacrifice the 'integrity of the currency" by holding suspect mortgage-backed securities;
5. The Fed can't give away the shop by bailing out investment banks, hedge funds or private equity.
The bottom line is that the Federal Reserve is a central bank and "should be" independent of the political process. That is, the Fed needs to be the Fed!
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