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It’s no wonder calls are now being heard
in Congress for a change to the Federal Reserve’s dual mandate of low
unemployment and price stability since the central bank continues to have a
rather myopic view of the world, the most recent example being the defense of
some $600+ billion in money printing as part of a second round of
quantitative easing (now commonly referred to as QE2) as it relates to the
10+ percent plunge in the trade weighted U.S. dollar since the summer that has
only recently reversed because the sovereign debt troubles in Europe are now
looking even worse than the money printing in the U.S.
Not giving the central bank so much to think
about today might be a good idea.
In fact, maybe a gold-backed currency would be
an even better idea.
As Jim Grant noted in a NY Times op-ed over the weekend, the central bank would then have
an even simpler job where it wouldn’t even concern itself with the
level of consumer prices. Rather, it would have “the single public
function of exchanging gold for paper or paper for gold”
based on whether the public wanted one or the other.
Of course, such a system might put most
– or, perhaps all – of Wall Street out of business, but that
would just be an added bonus.
After a barrage of
criticism in the two weeks since QE2 was announced to the world – not
the least of which was the charge of “pursuing a policy of currency
weakening” by former Fed Chief Alan Greenspan – in
addition to the Fed worrying about prices and unemployment, it now seems to
be spending an inordinate amount of time defending its latest money printing
program and trying to make the case that a weaker dollar was not
its intent.
The Fed’s goal, or so they say, was to
strengthen the domestic economy and, with inflation quite low and
unemployment far too high, printing upwards of another trillion dollars to
buy U.S. debt over the next eight months seemed like the right thing to do.
Besides, despite its outsized impact on the
international value of the U.S. dollar, that is not one of the
Fed’s responsibilities – that job goes to the Treasury Department
where decisions are made regarding how much and at what price U.S. debt will
be sold. But, now that the Fed has became one of the biggest buyers of that
debt, the central bank has become equally responsible for the national
currency, a point that seems quite clear abroad, but one that is not
recognized widely in the States.
But, back to the question of intent, does lack of intent really matter?
Just yesterday, Atlanta Fed President Dennis
Lockhart took issue with the idea that the U.S. was attempting to drive the
dollar lower in order to boost its export sector when he noted, “There
is no monetary policy intent to engineer specific values — or even a
direction– for the dollar … This policy was not undertaken to prompt dollar depreciation”.
Since the men and women at the Fed have proven
themselves to be quite good at math and statistics but quite bad at applying
these skills in the real world in order to prevent all sorts of financial
market crises in recent years, let’s give them the benefit of the doubt
on this.
Let’s assume that clipping a dime off of
all those dollars circulating around the world wasn’t their primary
goal.
But, shouldn’t they have considered the
possibility that almost another $1 trillion in money printing would compel
markets to sell the dollar?
It’s not like this is the first time
this has happened.
Back in early-2009 when QE1 was announced, the
U.S. Dollar Index dropped almost three percent within minutes as the gold
price soared by more than $50 an ounce.
You’d think that, while discussing this
amongst themselves, someone in addition to long-time dissenter Thomas Hoenig of the Kansas City Fed (who doesn’t seem to
like anything the Fed has done lately) would have said
something like, “You know. Lots of central banks are tightening right now and if
we announce another major money printing program, that’s probably going
to sink the dollar and then we’re going to catch hell from
somebody”.
But, apparently not.
Whether the Fed’s intent
was to drive the dollar lower is almost irrelevant.
They have once again displayed to the world
that, while perhaps being quite good with math and statistics, they are
increasingly out of touch with the real world, a condition that seems to be
getting even worse after allowing multiple devastating asset bubbles to
inflate and burst over just the last ten years.
Regarding QE2, what is now more disturbing
than the question of the intent of the Fed’s words and actions is the
question of their awareness of the impact that these words and actions have
in the world.
It seems that the Fed has become even more
myopic since the Greenspan days and the planet would probably be better off
if it was given less power and fewer things to think about, not more.
Tim Iacono
Iacono
Research.com
Tim Iacono is the founder of Iacono
Research which provides market commentary and investment advisory services specializing
in macroeconomic analysis and commodity based investing. He also writes the
popular blog The Mess That Greenspan Made.
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