Weak Dollar Is Evidence Of Incompetence By: Patrick Barron , The Bulletin Lawrence Kudlow correctly identifies the many problems caused by a weak dollar, but he gives the impression that the dollar can be manipulated independently of other governmental policy to stop its slide in international currency markets. It is true that a weak dollar causes inflation, makes a recession inevitable, raises effective tax rates, and is seen - appropriately - as a sign of American weakness. But Mr. Kudlow's only two answers for stopping the dollar slide are demanding that the Fed "initiate open market operations to boost the greenback" and "conducting dollar strengthening diplomacy" with our trading partners. We should do neither of these, because they will not work. First of all, it is Federal Reserve Bank intervention in the currency markets through buying and selling Treasury bonds - the open market operations described by Mr. Kudlow - that have caused the dollar weakness. The Fed may intervene to either sop up dollars (reducing the money supply) or inject liquidity (expanding the money supply). There is no reason for the Fed to do either of these things. At the heart of such a recommendation is the fallacious belief that money is something other than a medium of exchange to be used for allocating scarce resources in society. Here's the insurmountable problem: Resources are scarce, whereas fiat money is not. Since fiat money is one half of every exchange and is the method by which we calculate the worth of every good and service in society, it cannot effectively represent scarce resources by references to itself, since fiat money itself is not scarce, too. To do so, as our law demands, is a contradiction of logic. Yet when the Fed intervenes in the monetary markets, with the approval of the likes of Mr. Kudlow, this act is itself an affirmation that fiat money has no real worth. Who would want to hold dollars when our government proclaims that it will continue to debase its purchasing power? Just this week the Fed announced that it would inject another $200 billion into the economy and would inject even more money if it so desired. Each proclamation further weakens the dollar, because our trading partners expect their dollar holdings to lose even more purchasing power. Mr. Kudlow gloats that the dollar is still a reserve currency, as if this were some honor bestowed upon the dollar that could not be taken away. The dollar's role as a reserve currency is simply an accounting and pricing tool, on the one hand, and supposedly a store of value on the other. But if the dollar cannot be used to price commodities and is no longer a safe store of value, its role as a reserve currency will fade. This will not happen as an announcement by some official international body but by actions of our trading partners as they give us less and less of their own currency for ours. In effect, our trading partners will charge us a storage fee in the form of a less favorable exchange rate for holding a depreciating asset: the dollar. Mr. Kudlow hits the nail on the head when he states that a weak dollar is seen internationally as a symptom of a weak United States. Our political leaders have proven that they are incompetent; they even advertise the fact in their press conferences. The pronouncements by Ben Bernanke, chairman of the Federal Reserve Board, are especially embarrassing. In a speech this past week he advised bankers to consider rewriting their existing loan contracts in order to prevent delinquencies. Wow! No wonder he's chairman of the Fed! No businessman, whether banker or widget seller, would ever consider working with a customer to whom he had extended house credit! This was followed by a promise to further debase the dollar in order to keep incumbent politicians in office - oops! I mean prevent recession. This is the greatest howler of all, that flooding the currency markets with more fiat money will prevent recession. All it does is cause the price of American goods to rise, a form of hidden tax on the ordinary American citizen for which neither he nor his representative in government gave approval. Talk about taxation without representation! There is only one way to prevent the dollar from continuing its slide: stop expanding the money supply. No more open market operations. Force government to tax us, at its peril, or borrow from us honestly if it wants to spend. But the last thing that government wants to do is curtail spending or disclose the true cost of its profligacy, which a sound currency would reveal. It is time to dissolve the Federal Reserve Bank and return to sound money, money that is not in the hands of government, before our great nation is destroyed by the utter incompetence of the political class. Patrick Barron is a consultant to the banking industry and lives in Pennsbury Township, Chester County. He can be reached at PatrickBarron@msn.com. http://www.thebulletin.us/site/index.cfm?newsid=19384469&BRD=2737&PAG=461&dept_id=576361&rfi=8
I'm sure that the weak dollar is viewed as a bad thing internationally because it makes their exports less competitive with USA domestic products.... and weak dollar =recession? Who tells these idiots to say this stuff? In the 80's we had a weak dollar, imported cars went up in price, the US was exporting steel to Japan, whole industries were revivied and the economy boomed as I recall........
or a sign of genius... the US is dine and dashing on trillions of obligations after enjoying a nice and prolonged period of wealth and prosperity.
this recession comes not from week dollar but from indebted consumers. Consumer economy was not sustainable and consumer part will shrink from 70 to 50-60% If dollar is abandoned as a reserve currency, dollar will crash and manufacturing might return as US worker will be cheaper than chinese Although in this case consumer will be just 30-40% of the economy as effective wages will be 1-2 $/hour in current dollars
Perspective holmes... hotels in Europe were turning down dollars when Nixon finally took us completely off the gold standard. They were demanding payment in French Francs...LOL co
I don't see "weak dollar = incompetence" as much as it's a reflection of (1) greed of US politicos to deficit spend, and (2) criminal dilution to obfuscate their greed. Incompetence? No.... they know EXACTLY what they're doing.