U.S. dollar has lost 40% of its
purchasing power as measured
against a basket of foreign currencies
in the last decade alone.
Thursday, April 28, 2011
Euro Pacific Capital
By: Michael Pento
Thank God the Fed has a Strong Dollar Policy
The Fed has kept interest rates at zero percent for 27 months and has created--out of the blue--2 trillion new dollars in the last few years alone. If these actions constitute a strong dollar policy, Americans can only cringe at the thought of what a weak dollar policy on the part of the Fed would possibly look like!
Ben Bernanke’s hour-long press conference was packed full of an amazing quantity of contradictions, and economic fallacies. For example, the price of gold soared by $25 during the conference as the dollar was falling to a new 52 week low. In fact, the U.S. dollar has lost 40% of its purchasing power as measured against a basket of foreign currencies in the last decade alone. And the price of gold has risen 400% during that same time frame. Yet somehow Bernanke wanted investors to believe that these conditions are just transitory even though they have been in place for the last 10 years. How could they possibly be transitory if the Fed maintains its zero percent interest rate policy and refuses to reduce the size of its balance sheet?
He also had the temerity to suggest that stable prices actually engender rising unemployment and that inflation needs to be near 2% for an economy to function properly without the threat of deflation. But the former Princeton Professor never explained the economics behind how a strong and stable dollar can ever lead to increasing layoffs. Could it be that Bernanke is unaware that a stable dollar is absolutely necessary for a vibrant middle class and to have an economy that is balanced with the appropriate amount of savings and investment?
The Fed head finally uttered a truth when he correctly stated that low and contained inflation expectations are essential for a strong economy and that the FOMC would closely monitor those expectations of rising prices. However, Bernanke fails to understand that he is doing everything in his power to make sure those inflation fears become intractable. He blamed the uptick in inflation on rising commodity prices that are again supposedly “transitory”. But he fails to associate those rapidly rising commodity prices with the fall of the dollar, which is directly the result of the Fed’s monetary policy. He instead blames the 30% rise of the CRB Index in the last year on “global factors.”
But the most egregious error made during the press conference was Bernanke’s failure to acknowledge the Fed’s aiding and abetting of our huge budget deficits. Although he correctly identified the biggest problem facing our nation is our overwhelming debt, he failed to realize that it is the Fed’s sponsorship of an ever expanding money supply that enables our government to run up massive debts without sending interest rates so high that they render the nation insolvent.
The sad truth, however, is what will be transitory is the U.S. dollar’s status as the world’s reserve currency. The end of that condition coupled with rapidly rising inflation will eventually send interest rates much higher than any economic model Bernanke has ever seen.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.