Shock & awe? Or shockingly flawed?

Since we have been discussing the Dollar all week, let’s go to Alan Abelson’s Barron’s column this week, Debasing Bernanke.

With a wordsmith’s gift for clever wordplay, he opened the column "BEN BLINKED. Or was it a wink? Was he only funning the folks with all that malarkey about acting judiciously lest he encourage reckless financial behavior among the great unwashed — moral hazard, as the cognoscenti like to put it?"

We had titled our post-FOMC post on Tuesday "Bernanke Blinks."   Whether its surname or proper name, past tense or present, the similarities make us smile just a little on the inside. Anytime a scribe whose prose we admire or whose perspective is noteworthy or influential or just plain fun uses similar language to our own, we know that we are at least heading down the right path towards scribbling enlightment.

Anyway, back to the subject at hand, which is the ever shrinking purchasing power of the US greenback.  Here is the relevant Ubiq-cerpt:

"NO GOOD DEED, OF COURSE, goes unpunished. And wouldn’t you know, Mr. Bernanke’s muscular move that touched off a blistering rally in stocks also, it grieves us to report, had less salutary, if equally predictable, consequences in other trading arenas. Turmoil in the credit markets, which presumably was among the Fed’s primary concerns prompting the rate slash, though hardly erased, nonetheless was suddenly overshadowed by turmoil in the foreign-exchange market and ominous disturbances in key commodities.

Our own beloved currency turned garishly green around the gills, nicely matching the traditional color of its back. A euro fetched a record price in U.S. dollars and the Canadian dollar — the loonie — achieved parity with our battered buck for the first time in over three decades (who’s crazy now?). Virtually every currency known to man appreciated against our beleaguered greenback, which did hold its own, we’re happy to say, against the Zimbabwean dollar (inflation in that ruined nation is running an estimated 15,000% a year and seems determinedly headed for six figures).

Moreover, the latest dizzying descent in the buck can only make our foreign creditors, those generous folk whose forbearance, encouraged by our insatiable appetite for their goods, has enabled us to live the good life on borrowed money, all the more antsy. They had already shown growing disquiet over the steady erosion of their huge hoards of our IOUs, by edging their reserves into more stable currencies.

The incidental devaluation of the U.S. dollar sent the price of crude, which is denominated in dollars, barreling to an all-time high above $84 a barrel before it paused to take a breath. And the fresh debasement of our coin, coupled with prospects of a surge in inflation, powered a spurt in gold to nearly $745 an ounce, the highest price since January 1980, when it hit $850 as bungling Bunker Hunt tried to corner the market for the yellow metal.

The moral imperative that inspired Mr. Bernanke to take down interest rates half a point instead of a quarter was to ease the pressure off the reeling housing market. In the event, though, he managed to steepen the Treasury yield curve, which means that the longer-term obligations, which effectively determine the level of mortgage rates, went up. Not, we suspect, the ideal medicine for what ails homebuilding.

Indeed, it’s doubtful that any of the palliatives being proposed to dull the pain of mortgage holders who can’t meet their payments or improvident lenders in the soup are likely to prove very effective. The latest data certainly provide little comfort. The news from the builders is uniformly bleak. And, as the aforementioned Minter and Weiner note, foreclosures on subprime loans alone could result in cumulative losses of — gulp! — $164 billion. It’s also reckoned, they say, that a 15% decline in house prices — not exactly outside the realm of possibility — could wipe out $3 trillion of household net worth.

It’s ease to see what got us into this bloody bind: a breathtaking binge of mindless borrowing accommodated by legions of lenders uninhibited by scruple of any sort, mightily aided and abetted by Wall Street’s ingenuity in discovering new ways to create and peddle leverage. And, of course, by snoozing watchdogs, like the Fed.

How to get out of the very sticky mess is a bit more difficult to envision. Except cutting rates and going the way of Zimbabwe probably isn’t it."

A shrinking dollar means reduced purchasing power, which is in and of itself the equivalent of a particularly pernicious form of inflation.

But not to worry, the solons and spinmeisters have assured us that the dollar will raly upon the news!

Shock & awe? Or shockingly flawed?


Debasing Bernanke
Barron’s September 24, 2007   

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Fear of a Dollar Collapse, part II

Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.

Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.

This is simply a measure of how much cash the Fed is injecting into the system.

The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:



Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.

This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.

As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?"  I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless. 

The manifestations of this free  printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.

Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less. 

Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!

For gold, the process is not all that dissimilar.

Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.

Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices:  Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.

Its easy to understand why inflation has been called The Cruelest Tax.


BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.

There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.


Monetary Trends
Federal Reserve Bank of St. Louis’
October 2007

Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
WSJ, September 20, 2007; Page C1

Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
WSJ, September 21, 2007; Page C6

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