Why the US's "Strong Dollar Policy" is Anything But

The colors are turning here in this capital city. Trees lining the Palermo streets, once a vibrant green, are lately tinged with auburn. Their leaves resist the fatal kisses of the cooling night air, before being taken up by the breeze and falling to the ground. The days, too, are shrinking before our very eyes.

We’ve just returned to Buenos Aires after a couple of weeks in Uruguay and Brazil. It’s good to be back. Some things – the weather, for example – have changed. Others – like depressing/entertaining news headlines – remain more or less the same. Let’s have a look…

“Fed approaches crossroads as growth slows…” says one paper…

“Euro strikes 16-month high against dollar…” reads another…

And then, “Geithner vows to defend strong US dollar policy…” from the very same wire…

Hmmm… What to make of all this? We’re reminded of that joke about how you can tell when a politician is lying. (His mouth is moving.) A strong dollar policy? He must surely be kidding. How can Mr. Geithner vow to defend something he has never had?

“Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country,” Geithner told a New York conference organized by the Council of Foreign Relations.

Then, threatening to add perjury to comedy, “We will never embrace a strategy to weaken the dollar.”

Remember when Geithner stood in front of those university students in Beijing a couple of years ago to assure them of his same strong dollar policy? “Chinese [dollar] assets are very safe,” he said, without even cracking a smile or giving a wink. As far as we remember, the students took his deadpan delivery very well. They laughed right in his face.

Two years later – thanks largely to some crafty collusion between Mr. Geithner and the man we now know as “The Bernank” – the dollar continues on its up and down rollercoaster ride. Mostly though, it heads lower. One year ago today, the dollar index stood at 86.5. This morning, it is seen languishing around 73.8, testing lows not seen since 2008. So far this year, the once-mighty greenback has lost 6.5% of its value compared with a basket of currencies held by her major trade partners.

What are the Feds doing about this dismal – and accelerating – decline in the value of the nation’s compulsory, unquestionable currency? Why, they’re having a meeting, of course. Good for them.

“The Federal Reserve’s top policy panel will on Tuesday begin a two-day meeting in Washington, where it will weigh whether the recovery can make do with less central bank stimulus,” reports Bloomberg.

“The seven men and three women who vote on the Fed’s rate-setting panel will decide whether or not to extend a $600 billion stimulus plan that is scheduled to end in June.”

The report goes on to reveal that, until recently, the recovery was, in the Fed’s own words, “on a firmer footing.” But now, thanks to “higher oil prices and government spending cuts, the economy now appears to be slowing.”

How, we wonder, can an economy be slowing when the government spends less of the productive class’s money? Only economists who judge government spending to be an asset, rather than a liability, could possibly claim such an absurdity. And how can an institution that is openly attempting to light inflationary fires blame rising prices – an effect of their very own policy – for hindering their efforts? Aren’t higher prices exactly what they desire? Well, now they are getting them…only not in the assets they want.

Housing, for example, is still in the dumps. The latest figures available from Standard & Poor’s Case Schiller housing index show February to be the eighth consecutive month of declines. Housing prices shed 3.3% against the same month last year and are barely half a percent off their 2009 recession lows. Measured against their bubble highs of 2006, S&P/Case-Shiller’s index of home prices in 20 cities shows a 32% decline.

But wait, gold is up. Silver is up…and up…and up some more. Coffee just hit a 34-year high at three bucks a pound, alongside multi-year records for a slew of other commodities. And oil, as bemoaned by the Feds, is firmly over $110 per barrel.


Of course, it’s not that the Feds don’t want to control the economy. (We’re quite convinced they do, alas.) It’s simply that they can’t. This is the error that F.A. Hayek called “The Fatal Conceit.”

In short, central planners are not possessed of an all-knowing omnipotence. At best, they can probably only hope for an unknowing impotence. Price signals, not policy wonks, enable market participants to make better, more informed decisions. Until we see a bear market in Fed confidence, therefore, we’ll continue to see a bear market in the state of the overall economy they attempt to manage.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning