Friday, August 12, 2011

Dollar-killers

Former Assistant Treasury Secretary (under President Reagan) David Malpass penned a withering criticism of the Fed this week in the Wall Street Journal. Conservatives will enjoy reading it but liberals should read it as well as the Fed can sink a President's economic policies almost overnight with one meeting. While we can go back and forth in the tax & spend debates, the Fed's policies are killing the economy as the dollar weakens and inflation starts to emerge. Read on:

"With all eyes on the debt-limit debacle and Washington's out of control spending, it's easy to forget the monetary-policy mess created by the Federal Reserve and its near-zero interest rate. But it is even more harmful for economic growth than our $15 trillion debt and might get worse if the Fed lurches toward QE3, another big wave of bond buying being urged by big-government forces.

The U.S. is practically alone in the world in pursuing a near-zero interest rate and letting its central bank leverage to the hilt to buy up the national debt. By choosing to pay savers nearly nothing, the Fed's policy discourages thrift and is directly connected to the weakness in personal income. The zero-rate policy only benefits mega-borrowers like federal and state governments, big banks and big corporations—a group not known for much net private-sector job creation. The select few are able to borrow cheaply, but corporate proceeds often go abroad while most government borrowing just encourages deficit spending.

The combination of super-low interest rates and trillions in leveraged Federal Reserve debt constitutes a semi-official weak-dollar policy. It has driven gold to a record high and made the dollar one of the world's weakest currencies. The dollar index has fallen 38% since 2002 (to 75 from 120) despite cynical statements by officials that a "strong dollar is in our national interest." To protect themselves from the weakening dollar, investors and corporations are shifting growth capital from U.S. businesses into foreign infrastructure and jobs, a process that is dismantling decades of U.S. wealth creation.

One of the fastest, most decisive ways to restart U.S. private-sector job growth would be to end the Fed's near-zero interest rate and the Bush-Obama weak-dollar policy. As Presidents Reagan and Clinton showed, sound money is a core growth strategy—the fastest and most effective way to tell world capital that the U.S. is back in business. Instead, near-zero rates and a weak dollar severely undercut the Federal Reserve's credibility, once one of America's strongest magnets for global investment.

Weak monetary policy isn't providing monetary stimulus. Under the 2010 QE2 Fed bond-buying scheme, the more the Fed intervened in markets, the weaker the GDP growth each quarter. Banks are overflowing with liquidity already, but their lending is rationed by armies of federal regulators sitting rent-free in their offices. The interbank market—which normally moves large sums from cash-rich banks to the growing banks that lend to new and small businesses—can't function properly with rates at zero. Monetary policy's goal of market-based allocation of capital has morphed into subsidizing debt and manipulating the dollar downward.

Only Japan, after the bursting of its real-estate bubble in 1990, has tried anything similar to U.S. policy. For close to a decade, Tokyo pursued a policy of amped-up government spending, high tax rates, zero-interest rates and mega-trillion yen central-bank buying of government debt. The weak recovery became a deep malaise, with Japan's own monetary officials warning the U.S. not to follow their lead.

As American capital escapes the weakening dollar, it drives down U.S. living standards. Since the end of 2008, the average hourly wage is up only 4.5% (to $22.99) while the consumer price index is up 6.1%. Social Security checks haven't gone up at all. Much of the private sector feels stuck in the mud, yet Wall Street and Washington are booming. They are the middle-men in the wealth transfer from savers to debtors and foreigners, creating thousands of millionaires each year trading currency volatility and inflation hedges. The profits are immense, but it's a zero-sum game in which the losers are the millions of Americans who work and save in dollars. Put the question to the public or to small businesses whether President Obama should run a weak-dollar policy and the answer is a thunderous "No!"

Countries around the world grow faster when they implement sound money. This offers a turnaround path for the United States. Brazil's economic boom dates from early 2003, when President Luiz Inacio Lula da Silva decided to stop the real's crash. Russia's frenzied collapse ended almost overnight in 2000 when then-President Vladimir Putin stabilized the ruble. Australia's per-capita income has more than doubled since the Aussie dollar started its climb in 2002. The strong Canadian dollar, backed by a well-run central bank, is a magnet for American investment, rising to $1.04 from 65 cents a decade ago while paying solid interest rates.

Most important for world growth, China's economic surge started in mid-1993 after Zhu Rongji—trained as an engineer like many other senior Chinese leaders—sat at the central bank and created a yuan that would hold its value. China's boom hasn't stopped.

Washington's twin crises—fiscal and monetary—are killing jobs. It may take years to fully unwind the federal government's debt buildup and the entrenched tax-and-spend culture driving it. But the president, or his deputies, could stop the monetary-policy half of the crisis tomorrow, renewing America's spirit and job growth. The historical evidence is irrefutable—investment floods to strong and stable currencies
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9 comments:

Anonymous said...

I think the former Secretary is ignoring the elephant in the US economic living room, the housing market.
He is also crediting China's boom with monetary policy which had, in my opinion , very little to do US firms ( among others) moving to China.
China, too, doesn't have a divided nation where uninformed constituencies have to be appeased. The government can make long term policy and a business entities or citizen doesn't have to gamble on which side will prevail when making financial decisions.They simply have to make sure their population has enough of the basics to survive and control the flow of information to that population.

Kingfish said...

I don't think he is ignoring it but he is separating it. Fix the economy and housing will take care of itself as people have more jobs and income to some degree. I think his thesis is a sound monetary policy helps the economy grow, which fixes other problems.

Keep in mind it was Greenspans keeping rates artificially low which helped create the housing boom. I said "helped", I didn't say it was the only cause.

KaptKangaroo said...

The zero-rate policy only benefits mega-borrowers like federal and state governments, big banks and big corporations—a group not known for much net private-sector job creation.

This would be why my retirement is in large multi-nationals who repatriate earnings in USD$. Dollar goes down, profits go up.

I've also heard this argument over the past few days, the one big issue is inflation. I'm not sure what the ceiling is for the American Public, but if I have a job, I can at least deal with it.

Anonymous said...

"To protect themselves from the weakening dollar, investors and corporations are shifting growth capital from U.S. businesses into foreign infrastructure and jobs, a process that is dismantling decades of U.S. wealth creation."

A weak dollar would help U.S. exports and manufacturing. This is what has fueled the boom in China he later lauds. Capital has left the U.S. due to labor arbitrage, seeking the lowest possible labor cost and regulatory environment in which to operate. The other countries he applauds, in addition to China, are just now realizing their own asset bubbles have burst....namely Canada and Australia for housing.

His most apt statement was one of the last, "It may take years to fully unwind the federal government's debt buildup and the entrenched tax-and-spend culture driving it." I would argue it could more than a decade. We are the new Japan (fiscally and physically). Low interest rates and deflation (not inflation) will be evident for years.

Anonymous said...

I would suggest that since the 70s, the interest rate on investments versus the interest charged on debt has been a factor in the decline of the middle class.
The importance of a thriving middle class seems to be omitted from the analysis of our economic woes. It is we have reduced the consumer market for goods and services by increasing the cost of borrowing while reducing the return on savings and individual investment for the middle class.
Much,also, is made of people borrowing more than they can afford to repay. But,little to nothing is said about the financial institutions who lent to people those institutions knew OR SHOULD HAVE KNOWN couldn't repay their debt. Nor is there discussion of OVERVALUED assets. Worse, the lessons of the S&L crisis were apparently, if we can make poor lending practices legal, individuals can make tons of money without going to jail and investors and borrowers will be left holding the bag. And, that reduces revenues as some of the " bag holders" are the upper middle and lower upper classes who pay taxes.
It's not just an economics, it's socio-economics.
Discussing the fed policy on interest rates only in terms of the effect on the value of dollar seems to me to be more about politics than economics at this point. Without these diversions to cast blame away from where it actually lies, the public might discover that the regulations and laws were changed over the last 4 decades so as to make what had once been criminal activity in banking and on Wall Street, legal. The public might then start to ask who profitted by making stealing legal. Both parties would then have as Ricky Ricardo use to say, " alot of splaining to do".

Anonymous said...

Time to end the Feds dual mandate. The Fed needs to focus on a strong currency and not be required to achieve low unemployment. Congress has delegated itself to a place only for special interest favoritism.
3 regional directors voted against the latest chairman pledge of near zero rates until 2013, a sign that not everyone is on the same page.
I think QE3 named that or not is a certainty as the 'can' is kicked down the road and the debt pit is dug deeper.

Anonymous said...

Thanks for sharing this.

KaptKangaroo said...

Socio-economics is certainly an issue if you are unskilled at managing money. Additionally, when friends who were smart enough to understand 0 down mortgages and began to speculate int the Florida Coast, I could not agree with you more that "smart or skilled" money folks were willing to take the risk. The middle class lost out when the Fed chose to back all that risk during the downturn. The middle class let this happen and those of us were unable to stop it, so we have yet another entitlement, this time for speculative. The landscape is littered with the middle class home owners that didn't know any better. That is about the only socio-economics I see - speculative greed led to the over pricing of assets in the housing market. The responsible middle class is just going to suck up the cost of it in the end.

Shadowfax said...

"Big banks and big corporations" are "not known for much net private sector job creation"? Really? (only millions!)

Kangaroo must have had a reason for starting his post with that quote. Well, other than it being a ridiculous assertion.

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