The Fed is foolishly weakening the dollar
Devaluing the dollar is spoiling global economic recovery. The Fed and President Obama must reject easy money and ever-larger deficits.
Has America's Federal Reserve become the single greatest obstacle to global economic recovery? Central bankers around the world are increasingly asking this question as the American greenback continues its Fed-inspired decline and damages the export-driven growth of countries from Latin America and Asia to Europe.Skip to next paragraph
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Historically, the Fed has responded to economic downturns by cutting interest rates to stimulate domestic business investment and consumer purchases of "big-ticket" items, like automobiles and housing, that are sensitive to the cost of loans. However, in the current crisis, this traditional formula is simply not working.
It's not working in part because the Fed's "solution" has been a concentrated dose of the problem. After years of promoting the easy money and loose credit that fueled asset bubbles, it has responded with even easier money and even looser credit. It's like fighting fire with gasoline.
American consumers are not responding to the Fed's liquidity surge because high employment, high oil prices, bottoming home prices, and stagnant wage growth have squeezed their purchasing power. Business investment has likewise failed to fill the recessionary gap because much of the investment US corporations used to make on American soil is increasingly being sent off shore.
Despite this lack of responsiveness, Fed Chairman Ben Bernanke continues to throw monetary stimulus at the problem – and thereby has created an international dollar crisis now threatening the global recovery.
The declining dollar story is one of weakening demand for, and a massive oversupply of, the greenback. It is a sad and sordid tale scripted almost entirely by the Fed.
During the worst months of the global financial crisis, investors flocked to the dollar as a haven amid the storm. But since March 2009, when economic policy under the Bernanke Fed and the Obama administration became clearer, they have fled the greenback. In that time, the dollar index has fallen 16 percent.
You can't blame investors for selling. By first driving, and then maintaining, short-term interest rates near zero, the Bernanke Fed has made it far less attractive for them to hold dollars.
In a desperate effort to break the back of the credit crisis, the Fed has also engineered the most massive increase in the money supply in US history. Since 2007, the Fed has roughly doubled the monetary base. This, however, is only half of the oversupply story.