US Dollar in Free Fall, Bernanke too Spooked to Raise Interest Rates

Exiled from home and hearth, your poor editor lodges in one of the most expensive cities on earth. But what’s this? It’s getting even more expensive! Last night, he took his son out for dinner at a cheap Italian place under the railroad tracks. The bill came to US$66 – and we didn’t even have dessert.

“Dollar, in a tailspin, reaches a new low,” reports the International Herald Tribune. Meanwhile, the Dow lost 148 points.

Yesterday, the buck again hit a 26-year low against the pound…and an all-time low against the euro. It now costs US$1.37 to buy a euro.
American tourists beware! Be sure to refinance your home before coming to Europe for a vacation.

“The dollar is a basket case,” the paper quotes our friend Peter Schiff. “We are going to pay the piper for years…”

Three years or so ago, we suggested that the dollar would go to US$1.50 per euro. The buck promptly went up – making a fool of us. But even the world’s luckiest currency cannot escape the fundamental laws of economics forever. Now it is being hauled before the court and, like a Chinese official and given a harsh sentence.

All the world now works on a paper money system…and all central banks try to debase their currencies to keep up with the dollar. But no major nation has the bad rap of the US monetary brand. The papers tell us that investors are “worried about America’s subprime crisis”. But that is only a small part of the story.

Yesterday, Fed chief Bernanke appeared before the people’s representatives and pulled a Greenspan. That is, he spoke in gobbledygook rather than plain English. Americans have “less erratic expectations” for inflation, he said.

Interest rates have not been raised because…”although inflation expectations seem much better anchored today than they were a few decades ago, they appear to remain imperfectly anchored.”

What was that about? Here we offer a translation:

“Yes, I’d like to raise rates to fight inflation and protect the dollar…but I’m like spooked about this subprime mess.”

Hearing this, investors realised that the greenback would get no support from the Fed. And then they got news that China’s trade surplus hit a new record in June – US$26.9 billion, half of it coming from the land of the dollar. This number was 87% higher than a year ago…and considerably higher than experts had predicted.

The dollar seems to want to sink with the yen to the bottom of the global currency pool. Japan’s central bankers, like our own Mr. Bernanke, are terrified of recession. Japan is an exporting nation, as is China. A rising yen would make Japanese products more expensive…and possibly doom the economy’s fragile recovery. In Tokyo, as in Washington, financial authorities are desperate to avoid a slump – and ready to sacrifice their currencies to avoid it.

Beyond that, the similarities end. Japan’s economy enjoys a very healthy trade surplus. It has huge foreign currency reserves. Japan is a nation of savers, with an economy that is fundamentally healthy…and coming off a 17-year funk.

America, on the other hand, has the world’s biggest trade deficit, the world’s largest debt, a tiny savings rate, and a boom/bubble economy that is now 25 years old.

And yesterday, when the dollar went down, the yen rose.

What can the dollar do now, but go down gracefully? US assets are already cheap compared to overseas prices. But they are probably going to become cheaper. This will permit foreigners not only to see more of the USA but to own more of it too.

As always, Mr Market may have plans of his own which he has not shared with us…and it’s no wonder that these recent developments have many market players in a tizzy.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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