You have a good point that I hadn't considered: perhaps the Fed doesn't have nearly as much control over the dollar as I'm assuming. However, they certainly have control over the price of money and the pressure on the money supply, and I do believe that variations in the money supply *eventually* show up in the currency markets. While it doesn't represent a shift from the "pedal to the floor" money supply jam that's been happening for the better part of a decade, Bernanke and AG are now admitting that they can't prevent a general deflation without sacrificing the currency, and voicing that decision is *huge*. Had they been successful in turning things around here, they could have permitted interest rates to rise to free market levels, rescuing the dollar in the process thanks to a combo of decent rates of return on US treasuries, currency stability, and flight to quality. Instead, they are admitting that they must sacrifice the dollar and the foreign capital inflows in order for us to take the bitter medicine and reduce the current account deficit.
Their approach is the only politically palatable one, but it further increases the risks, injures our trading partners, and destroys the credibility of the currency in the process. Given a Euro that is well-managed, the Clownbuck and all things denominated in it are in serious trouble.
They will avoid deflation at all costs, and they've decided it's time to apply the tourniquet. Sacrifice the limb (the dollar) to prevent death of the body (general deflation). The tissue death (loss of control over commodity prices, including gold) is undesirable, but better than the alternative.
BC |
