Why a Strong Dollar Isn't Always a Stable Dollar

One of the amazing things about our world is, the more the government messes up, the more mistakes it makes, the more powerful it becomes. A prime example is the Federal Reserve, which is easy money policies done at the behest of the Treasury Department in the early part of the last decade undermined the integrity of the dollar.

Though the dollar is rallying now, over the past 40 years, the value of the dollar has gone down 80 percent. In the last decade, it’s gone down even though we haven’t had, supposedly, a lot of inflation, as the Fed defines it. Still, by their standards, it’s gone down 30 percent. And so, in essence, because it is slow motion, we don’t quite realize how pernicious this is. You get periods, as we’re going through now, where you have a strong dollar, but that’s another artificial creation by the Fed, and it’s not going to last for very long. But again, it’s one of these distortions, because the Fed operates by whim, you don’t know what they’re going to do.

The Fed has distorted the markets by buying up assets, particularly long-term bonds, and riskless assets. It’d be one thing if they bought short term, but they’ve scooped them up, which – so companies are issuing more junk bonds, and so you get a situation where they’ve issued a lot of reserves. And this is where people get confused. They see all these reserves being created, and they say, this must mean a lot of inflation.

But if the regulations are such, and what they’ve done in the credit markets are such that you don’t use those reserves because you can just deposit them at the Fed and get interest on them, almost half of those reserves are from banks overseas in Europe, where they have negative interest rates at their central banks. So guess what? They park it over here, and that money’s not working in the economy.

In essence, the Fed – with the focus on the creation of reserves – don’t realize they’ve sucked out a lot of the credit from the marketplace. So they’ve artificially created a strong dollar, but they’ve done so in a way that doesn’t help the economy.

This type of strong dollar is unique in history because we haven’t quite grasped the new kind of damage they’ve done. We know the old kind of damage they could do; this is a new kind.

And the Fed, of course, is oblivious to what they’re doing. In fact, they’re becoming bigger and bigger. Supposedly this is an emergency measure; they bloat the balance sheet to over four trillion. Are they going to reduce that balance sheet? Oh no, heaven forbid. So as David Malpass, the economist, has pointed out, they’ve created sort of a sovereign wealth fund out of thin air.

Regards,

Steve Forbes
For The Daily Reckoning

Ed. Note: A strong dollar is not to be confused with a healthy dollar. We still suggest looking outside the greenback to protect and build your wealth for the long haul — and we have all the resources for you to get started right away – absolutely free. Simply click here.