Over the weekend the Barron’s cover story looked at the current state of the Fed monetary policy in an article titled C’mon Ben!
I don’t think anyone still believes that the US thinks a strong dollar is in it’s best interest. The dollar has very little going for it these days in that there will be trillion dollar deficits for years to come, the Fed is buying treasuries and keeping rates at zero in an effort to spur lending which anecdotally speaking appears to not be happening (there is also data to support the idea of very little lending).
There are dollar bulls out there but as best as I can tell the arguments here seem to focus on counter trend activity which even if correct is not a story about dollar health.
One interesting point made in the article was that the current zero rate environment hurts savers, referred to in the article as the prudent, while rewarding the scofflaws (the article didn’t use that word, I just think it’s funny). While I am not sure what priority prudent savers should be on the Fed’s list the idea of encouraging risk taking is not good insomuch as some people should not take risk or more practically speaking what ever amount of money you have that should not be exposed to risk should not be exposed to risk. Zero percent potentially encourages people to make bad decisions chasing yield with money that should remain riskless.
A point I have made repeatedly is that if you are getting 4% in a 0% world you are taking risk–hopefully you understand what that risk is.
Can we all agree that in getting to this point the Fed, the Bush administration and the Obama administration all took (or are now taking) extreme action, perhaps the most extreme action ever taken (I concede most extreme ever could be open to debate)? Based on how certain types of human frailties tend to repeat over and over it is reasonable to question whether the correct action can be taken at the correct time to prevent the sorts of things that the Schiffians are worried about (hyperinflation and a worthless greenback) from happening.
Without turning this into a political debate my sense is that Obama somehow does not understand the potential consequences of extreme action. I don’t think he understands, I mean really understands, that in general there are economic consequences for policy decisions. Nor do I think he understands, I mean really understands, the potential consequences of the actions taken to date during the current event. Were the Obama administration to talk more about potential consequences in detail they would instill confidence, some anyway, that they understand, I mean really understand, the potential and how to mitigate a series of negative consequences.
A huge part of the problem here is that political cycle and the priority of reelection above all else works against finding the best solution. Pretend for a minute that they can figure out a plan of short term pain to create a long term fix, what Senator due for reelection in 2010 will vote for something that causes short term pain? With that line of thinking what member of the House would ever vote for the tough choice?
A rather brutal analogy; In 1982 I was diagnosed with a rare but treatable form of cancer. I was told that it was very unlikely that I would die from this but I was going to be in for a bad 48 weeks. So the trade off was a bad short run for a healthy (knock on wood) long run. As a country we lack the political will for a bad 48 weeks (more likely a couple of years or so).
One line of thinking that has been mentioned elsewhere that I buy into is that the Fed needs, in the short run, to pick between the dollar and the stock market. Thus far it has chosen the stock market which creates the appearance of health but is not true long term health. Long term health would come by choosing the dollar instead which means rates would go up, there would be less or no monetization and so a big drag on stocks for a while as everything but the equity market moved toward real health. Perhaps this line of thinking is right or maybe it is wrong but for now it is certainly easier to just own more foreign stocks than you used to.