Declining Dollar to the Fed: Et Tu, Bernanke?

Still on the road to moksha…

Prices are rising in India – pushed up by the high cost of food. Thanks partly to a disastrous government policy of encouraging the over-use of chemical fertilizer, food prices are shooting up. In a poor country, food is a bigger part of the family budget than in a rich country. India’s CPI is rising at about 11%.

Flash from the TIMES of India:

A man brought his wife to Mumbai from Augangabad. He then took her to the house of someone she didn’t know and told her to wait there for him to come back. But he didn’t return. The wife asked the owner of the house what was going on. She was informed that she had been sold to the man for 40,000 rupees (a bit less than $1,000). Her family back in Augangabad came to her rescue. They bought her back.

A thousand dollars seems like a lot of money to pay for a wife. Especially when you consider all the expenses that come later. Food, shelter, transportation, Gucci, BMW, and so forth…

But it’s just another proof that the feds are winning! They’re reflating the bubble…at least to some extent.

Stocks rose again yesterday – largely on the good feelings inspired by Ben Bernanke. The US Fed chief let it be known that if the economy slips back into a slump it won’t be his fault.

The Dow rose again – 45 points. Gold went up $3. Oil gushed up over $82.

That’s the 22nd time in the last 27 sessions that the Dow has gone up. And it’s now above its high for this rally…at its highest point in 17 months. This brings US stocks back to their levels of…

…1999! Is that progress, or what?

Emerging markets, meanwhile – at least the BRICs – are back too. They’re back at 1995 levels.

Emerging economies are using this new appetite for risk to sell a record amount of debt. When the crisis came in ’07, the spread in rates – between emerging market debts and US debts – widened. People knew they could count on Uncle Sam to pay up. They weren’t so sure about India, Argentina and Zanzibar. So, the yields on emerging market debt rose.

But now that the feds’ program of reflation seems to be working, they’re going to take a flyer on emerging market bonds. They’re still a little riskier than US bonds (or so buyers believe) but they have higher yields.

Here in India, for example, a portfolio of municipal and corporate bonds is paying more than 9% interest.

Hey, wait a minute…isn’t the inflation rate 11%?

“Well, that’s an aberration,” explains an analyst. “It’s caused by rising prices for food. The long-term inflation rate is only about 5% or 6%. But the real play on Indian debt is in the currency. The rupee is a relatively strong currency. India just doesn’t have the debt problems that you have in America. Our bet is that you can earn 9% on the bonds and maybe another 50% as the rupee strengthens…”

The investor in Indian bonds has Ben Bernanke on his side. So does the investor in gold.

Bernanke told the world that he’ll keep rates at zero for as long as it takes…

…but that’s not all…

The Fed also announced that it was changing its policy. It said so in such a subtle way that most people probably missed it – including us. We only realized what it had done when we read an analysis this morning in The Financial Times.

In the past, the Fed has been “evaluating” the impact of buying up mortgages in order to support the housing (and presumably even the commercial property) market. Now, it says it “will employ its policy tools as necessary to promote economic recovery and price stability.”

Monetizing private sector debt certainly promotes the hell out of something…but we doubt it really promotes either economic recovery or price stability. What it promotes is the eventual destruction of the dollar…and the US bond market. Behind the bonds stands the dollar. And behind the dollar stands the Fed. The Fed is telling us that it is ready to stab the dollar in the back in order to keep up the illusion of ‘recovery.’

The Fed’s $1.7 trillion bond buying program – quantitative easing – is supposed to come to an end at the end of this month. We were looking forward to seeing what happened when the biggest player in the market – a buyer – dropped out. Now it looks as though the Fed might not drop out after all.

Yes, dear reader, the US is still on the road to financial moksha (the final liberation from the cares of this world…achieved by a Hindu sect – the Jains – by starvation.)

Bill Bonner
for The Daily Reckoning