The Weak Dollar Was Supposed To Fix Everything
by Michael Pento November 24, 2009
The inflation redux plan from the Federal Reserve and Washington is based on zero interest rates, massive deficits and quantitative easing, which are designed to bring down the value of the U.S. dollar and create inflation. That is the truth, despite promises from Treasury Secretary Geithner that he really means it this time when he says the United States has a strong dollar policy – the irony being, that he says this while concurrently begging the Chinese to allow the dollar to fall vs. the Renminbi. But their hopes placed in a lower dollar are woefully misguided and all that is being accomplished is to put into place the same conditions that brought the global financial system to its knees.
Messrs. Geithner and Ben Bernanke have been successful in bringing down the value of our currency. In fact, many of the negative factors that were in place before the global economic meltdown occurred have returned in full force.
The trade deficit for September surged 18% to $36.5 billion. That gap was the largest since the beginning of 2009 and largely due to imports surging 5.8% to $168.4 billion, which was the biggest increase since 1993. The news must have been greeted with cheers in D.C. After all, the deficit would mean more dollar weakness and signaled the return of the borrowing and spending consumer. But the news also meant that the strategy of balancing trade by destroying the dollar was not based on sound economics. The U.S. dollar fell from 78.5 on the DXY to about 77 during the month of September. In fact, the U.S. dollar has lost more than 16% of its value since March of this year. If a weak dollar discouraged imports and boosted exports, then why did imports surge by the most in 16 years?
Sorry Ben and Tim, the so-called benefits of a falling dollar didn’t materialize as planned. That’s because the inflation you created to bring the dollar down caused the price of goods made in the United States to become more expensive. Therefore, foreign exporters couldn’t really afford to increase the purchase of American made goods even though their currencies strengthened.
The Treasury and the Fed have also been able to bring risk appetites back to 2007 levels. The massive increase in money printing and government guarantees has reduced credit spreads to razor-thin margins. The Libor-OIS spread measures the spread between the London interbank offered rate for dollars over three months and what traders expect the federal funds target rate will be during the term of the contract. The gap fell to 0.10 percentage point this quarter, below the 0.11 percentage point average between December 2001 and July 2007, according to Bloomberg, and substantially below the record high 3.64% in September of 2008.
Likewise, the Ted Spread is back to the “good old days” as well. Last November, the gap between the 3-month Treasury securities and 3-month Libor was 199 basis points. Today, it is just 21 basis points. But the mispricing of risk that helped bring the financial sector down in 2007 and 2008 is not boosting bank lending to private industry. Bank lending is plummeting for the creation of capital goods and new businesses. However, a broad measure of the money supply, Money Zero Maturity, is up 8% year-over-year. That’s because banks are lending to the U. S. government, which is the only insatiable entity for borrowing that still exists.
So the benefits of a crumbling currency have yet to materialize. However, the ravages of pursuing such a flawed policy have started to arrive. The price of oil has soared and gold is setting new highs every day. Credit spreads are indicating that investors are mispricing risk yet again and the ballooning trade deficit indicates that we once again believe we can consume much more than we produce.
The stock market is dancing on top of a $2 trillion monetary base and that latent liquidity has sent commodities higher, while the dollar sinks. My guess is that Wall Street and Washington believes things are getting much better. But I’ve seen this movie already and I don’t like how it ends. As the prints on the consumer price index (CPI) become more and more difficult to ignore, the Fed will be forced to remove the life support provided by their free money policy. When that occurs, we will see the return of economic calamity. And maybe then we will have the courage to finally face and deal with the true problem. News flash to D.C. and Wall Street: It is not the misperception of an overvalued dollar, but rather it is our overriding debt.
Michael Pento is chief economist of Delta Global Advisors.
