Fed Chief Bernanke Claims We Benefit From Weak Dollar
In his recent testimony on Capital Hill, Fed Chairman Ben Bernanke cited the benefits of a weak dollar policy, in particular how a feeble dollar boosts exports and export related jobs and positively impacts the trade deficit. Are you f&*%in’ kidding me? This old yarn has been bandied about for years to help justify our failure to stand up while the greenback gets bloodied in currency markets.
Yes, a weak greenback lowers the cost of American goods in foreign markets and boosts the cost of imports here, but the positive impact on jobs is short-term at best. Currency exchange rates are not fixed and along with the prices of basic commodities quickly adapt to the weakened dollar. Any positive impact that the falling dollar has on trade and jobs is thus quickly wiped as soaring costs move to equilibrieum with exchange rates. As I’ve written about repeatedly, the 70’s era pricing pressures that we are experiencing now are a biproduct of reckless monetary policy by the Fed and irresponsible fiscal policy in Washington. We are all experiencing the pain of the government’s short policies, but I’m not sure I see anybody feeling those benefits Bernanke was talking about.
What I don’t get is why our government officials lets the Fed Chief get away with such bunk without even calling him on it.
Sphere: Related ContentWhat’s Really Behind the Fed Rate Policy
The supposed rationale behind the Federal Reserve’s low interest rate policy is to get extra cash into consumer’s pockets enabling them to buy buy buy and keep that economy humming along. So why is there nothing in my pocket save for a linted Werthers wrapper, a guitar pick, and a crumpled gas receipt?
One needs look no further than the Bush administration’s reckless fiscal policy to understand why the US is teetering on the precipice of economic collapse. Dubya inherited a $5.6 trillion dollar surplus, a product in part of Poppy going back on his “read my lips” pledge and signing the Omnibus Budget Reconciliation Act of 1990. The ensuing hike in the top income tax rate to 31% ultimately cost Daddy a 2nd term. Rather than continue with the government’s suddenly sound fiscal policy by using the surplus to shore up the country’s sickly entitlement programs and pay down the the debt, Junior came into office and pissed it all away through a series of ill-advised tax cuts. The tax cuts were not grounded in sound economic theory, but were a political gimmick to help defend Bush’s right flank against Steve Forbes in the 1999 Republican Primaries.
Professor Ling, my macro economics professor in college, had a rather shaky command of the english language and as such few of us ever understood a thing he said. The concept that did lodge itself in my brain was one he repeated with mantra like regularity: Guns or Butter. “Government must make choice,” would say Ling. It seems Mr. Bush never did take economics, for once he impaled the budget with those nasty tax cuts he proceeded to fight a pair of wars, increase farm subsidies, gift wrap a $ 1/2 trillion new entitlement to seniors in the form of a brobdingnagian prescription drug benefit. Wait a minute - that’s guns AND butter. What about Dr. Ling? The good Dr. failed to brief us on the Amex card theory or buy now pay… never.
With the surplus far off in the rear view mirror, Bush has been charging up the national credit card at a rate that would earn every citizen enough frequent flier miles for a first class trip to the sun. What does this have to do with lower interest rates you ask? Just hang with me as I tie this all together. So we are in serious debt, primarily to the Chinese, but also Japan, Brazil, Great Britain, and on and on. So out of hand is our debt situation that repayment could come only with painful, politically lethal cuts in programs that would affect us all. Our nation’s finances are such that the credit rating agency Moody’s has threatened the nation’s AAA rating unless vast changes are made to our finances. Wow. US Treasuries as junk bonds. Who would have thought that back in the days of the hanging chad?
All of which has sent the US dollar to plummetting resulting in record food and energy prices as it takes more dollars to purchase the same amount of commodities in foreign markets. Oil prices move inversely to the US dollar. As our dollar trades lower the price of oil - and by extension food, gas, coco puffs and everything else - goes higher.
And here, friends, is my point: When the Fed lowers interest rates it causes the dollar to fall further (securities paying lower rates have less appeal on the open market). From this you can see that the current Fed policy is counter intuitive. If the Fed wanted to put more money into the consumer till they would be adhering to a strong dollar policy. This would cause oil prices to drop precipitously, placing far more cash in consumer’s pockets than would any cut in interest rates.
So if this is the case, then what is the Fed up to? Sit down now because the answer is rather frightening. The operative word my friends is monetization.
Let’s say that one slowly…Â M O N E T I Z A T I O N.
Without getting to deep into arcane economic policy, monetization is the process by which a government essentially cranks up the printing press and floods the market with dollars (or rubbles, shekels, marks, etc.). The excessive liquidity devalues the currency and those devalued dollars are used to pay off the nation’s debts. This reason this appeals to the morally bankrupt pol is because nobody realizes you have done it until you’ve long packed the white house china in your duffle and jetted back to the ranch. In your wake those on fixed incomes are poverty striken, a nation’s savings has been wiped out, and the setting sun of an empires goes dark. It’s quite a price to pay to bookend our troops on the Ayotollas’ borders. Let’s add proliferation of nukes in the the most unstable region in the history of the galaxy to the bill.
If you don’t believe this is what is going on, go grab a shopping cart at your supermarket and see how much a hundred dollar bill fills it with when Bush first came to office. We are nipple deep into the process of monetization and devaluation. Maybe it’s time to put flag pins and roosting chickens aside and examine some of real issues that the next president will be grappling with.
Sphere: Related ContentHow Much Will you Get from Stimulus Bill?
President Bush signed the $168 million economic stimulus package into law this week. Â Along with tax breaks to businesses that invest in capital equipment and a personal income tax cut for 2008 in the form of a rebate to be mailed to taxpayers this summer, the plan will make it easier to obtain large size mortgages through the FHA. Â
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How much this modest stimulus will impact a $3 trillion dollar economy is open to debate. Â A much better use for the money would have been to extend unemployment benefits for its longer term impact on the economy, but I suppose if we all go out and buy ipods, blue jeans, and other consumables the stimulus would have done its job.
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 Want to know how much you are getting this summer?  Fill your information into this calculator and find out:
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Sphere: Related ContentCompared to Bernanke Greenspan Had it Easy
GDP at .6% annualized Rate, Inflation on the rise and Fed’s hands are tied.
The Commerce Department reported today that GDP rose at a seasonally adjusted .6% annual rate in the final quarter of 2007, citing the housing slump, a deceleration in consumer spending, inventory liquidation, and lower overseas sales as forces dragging on the economy. Economic growth was not only significantly slower than the previous quarter, but well below Wall Street’s already modest expectations. Of perhaps the greatest significance was the price index for PCE (personal consumption expenditures) which increased a staggering 3.9%, more than double the previous quarter.
What does this all mean? Despite the Fed’s newly aggressive rate policy it appears we are barreling head on into a recession. The question is will it be the mild brand that we’ve experienced over the past several cycles or a deeper more painful one, ala 1982?
Ben Bernanke certainly has his work cut out for him. The challenge facing him is far greater than anything Alan Greenspan—who worked primarily in an environment devoid of inflation—faced. Bernanke can’t train his focus on stoking the flames of the economic engine with nary a worry about inflation as his predecessor could. He has to balance the plunging dollar, collapse of the housing industry, decelerating consumer demand, credit crunch, exploding inflation with an economy in dire need of a capital infusion—how to manage one without submarining the other will be a very challenging task indeed.
Sphere: Related ContentThe Credit Bubble has Popped. What can be done?
Pop! Sssssssss. Â
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That’s the sound of the credit bubble deflating. The Federal Reserve, acting as an enabler, has kept rates too low for too long allowing an obscene credit bubble to inflate. Now we are feeling the pain. This abnormal policy created a distortion in capital flows making credit nations with low propensities for consumption our “dealersâ€, by taking their excess savings in the form of capital and channeling right back into the US economy, essentially allowing us to spend their savings as if it were our own. This created the illusion of prosperity, allowing Americans to maintain their high standard of living despite Washington’s lush spending habits.Â
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An unintended outgrowth of this debt subsidy was the creation of an underground financial system in the form of sub-prime loans, SIVs, CDOs, etc, bringing capital to places it wouldn’t otherwise have reached. This helped perpetuate a housing boom with prices rising by more than 20% annum. Homeowners were thus able to tap into their newfound riches in the form of home equity loans, funneling the money back into the economy and fueling the economic boom. As is want to happen in any bubble, excess ultimately built up in the system.Â
Sphere: Related ContentThe True Cause of our Economic Crisis: You Must Watch This!
Sphere: Related Content3/4 Point Rate cut will have Unintended Consequences.
It’s a tricky game the Fed has to play in assuaging market fear through the manipulation of rates - they need to show the market they take the problem seriously and will do what is needed to keep the wheels from coming of the economy, but they need to keep investors calm as well, for panic and the market don’t mix well.  While Fed Chief Bernanke certainly conveyed that he takes the problem seriously with this mornings 3/4 cut, I think he failed on the panic side of the equation.  3/4 a point is such a histroically enormous cut, particularly in light of our depreciating currency, that it is likely to make investors fear our policy makers are fleeing the theater screaming “Fire!”  All this cut says to me is that we are in much bigger trouble than anyone thought.  It certainly doesn’t motivate me to call my broker advising him to “buy buy buy”. The question now is what impact will this rate cut have on the falling dollar?  It is likely to put more pressure on the currency, which will only excacerbate those problems the Fed was trying to ameliorate.  At least we can stop worrying about what is ahead because the barrel has just tipped into the falls and there’s no turning back.Â
Sphere: Related Content8 Stocks with Heavy Insider Buying
One of the best routes to success in the stock market is following the trends of insiders. When managers are bailing out of a stock in droves there they usually have pretty good reasons, reasons that aren’t always apparent to the public at large. Look at all the major bubbles of recent memory. Looking back, if only we had the foresight to follow the insiders as they jumped ship we could have been spared so much pain. The insiders were bailing out of mortgage and housing stocks last year and look what wound up happening. There is another side of the coin. Heavy insider buying is usually a great indicator that those in the know believe a companies assets are undervalued. By adhering to a discipline of purchasing quality companies with heavy insider ownership that is trending higher, you will do very well over the long haul. With the market getting beaten around so far this year, a sound strategy is imperative.
The insiders of the following 8 companies have been loading up on shares. If you are looking to throw some money into the market now that it is well off it’s highs, these could be very attractive candidates:
- Adobe Systems - Just initiated a $30 million share buyback. Taking shares out of circulation increases the value of those that remain. A bullish sign.
- UPS - Putting aside the incredible story that UPS is (Take a look at Tom Friedman’s Freakanomics and you will mortgage your house to buy UPS stock. That’s if you can get a mortgage, but that is another story.)  The company is currently buying back $10 billion worth of shares. Wow.
- NII Holdings - Currently buying back 6% of all outstanding shares.
- Blackstone Group - Currently buying back $500 million in shares.
- Hearst Argyle Group -Â The Hearst Family Trust bought more than 400,000 shares of the company in December between $21.31 and $22.37 a share.
- Lee Enterprises - recently announced a share buyback plan of up to $30 million, through cash.
- CKE Restaurants - last week said it increased its buyback program by $50 million, making the limit of its total repurchase program $400 million. The stock trades for 6.5x cash flow.
- Embarq Corp. - recently announced that its board has approved a 10% increase to its quarterly dividend and a $500 million share repurchase authorization.
Wake Up! Economic Catastrophe Ahead
America is in a dire situation with our economy imploding and the traditional tools with which to fight the crisis unavailable due to fiscal mismanagement. We are approaching a tipping point, yet nobody seems to be discussing these issues, focusing instead on tears, nuance, and innuendo. The Dow is down another 100 points this morning and over 1200 points this year-that’s in 3 short weeks. The stock market is reacting in part to the collapsing housing market and a report this week showing that new home starts are down by more than a third. Food costs are soaring as we see the impact of $100/barrel oil finally working its way through the economy. Our currency is collapsing and no longer able to withstand our countries irresponsible fiscal policy. 
The falling dollar is inflationary as it drives up the cost of imported goods. With banks mired in the sub-prime mortgage crisis and unwilling to loan money, real estate prices continue to drop with those combined factors causing foreclosures to mount. Add to that witches brew the rising unemployment rate and we have some real trouble on our hands.Rising food and energy costs, coupled with insecurity over the economy and employment prospects, coupled with declining equity and the inability to tap into our only form of savings-our real estate-to offset these forces is having a chilling effect on consumer spending-the engine that has driven this economy for several years. So we’ve heard this all before, right? The Fed will cut rates, stocks will rally, housing will pick up, and all will be like before. Lets just say Perhaps Not. Read more
