Faber Says Bernanke Policy Will `Destroy’ U.S. Dollar

I like Faber, speaks the truth.

Time to pack the bags and move to brazil, in time for carnival.

OT, the money market auction rate freeze is large, and tons of corp cash is frozen. Has anyone analyzed who is affected regarding stock buybacks or real cash flow needs. That could be another string in our broken puppet.

Here’s is a technical q for Barry or anyone else who uses a newer Mac computer:

Can you play those Bloomberg videos on your Mac? I can’t ever get any audio (something about the asf format). I have to switch over to the bootcamp windows partition to play them.

Just curious.

I have to agree with him. One large bank needs to fail and a niche derivative market is yet to implode. They will come together.

On the other hand, sugar… Maybe that is an US play only? Because there is an over-supply of sugar right now everywhere else. Would somebody enlighten me, please?

Yet another misguided opinion. That whole discussion missed the point – Bernanke isn’t trying to juice growth, he’s trying to save the banking system from total breakdown. The effects of monetary policy on the currency and macro economy are secondary concerns for the Fed right now. It is ALL about keeping the banks solvent, and in turn keeping the economy out of a deflationary debacle.

Faber makes a good point about us favoring consumption over capital investment. Our corporation leaders are looking only at short term profits to juice their options and bonuses. Noone is looking at the longer term of providing plant, capital to produce more goods. this folly will be exposed over time.

mhm, you must not be listening to CNBC, they’re certain that we have tested the January lows and we are heading up! They fail to realize that the only reason we stopped at these levels is because of the Bernanke PUT! Once the market realizes that the only thing Bernanke did was put his thumb in the dike, we will go much lower! These Gurus always like to point out valuations, and historical references, that mean diddly-squat. My only question is how can the market participants keep on believing their bull-shit? Are American Investors that stupid? Has the media, and marketing finally taken over the minds of our last free-minded thinkers?

“My only question is how can the market participants keep on believing their bull-shit? Are American Investors that stupid? Has the media, and marketing finally taken over the minds of our last free-minded thinkers?”

You will never go broke underestimating the stupidity of the American people. After all they elected bush, oops that was the Supreme
Court wasn’t it.

Here’s my take on the dollar, sorry it is so long.

The simple fact is that the dollar’s decline, long predicted, has finally arrived. International currency markets will impose the discipline of prudent monetary and fiscal policy, even when we are unwilling to do so ourselves. Our profligate consumption borrowing, both in the private and public fisc, is coming home to roost. No economic system ever got rich borrowing money to buy play-stations and other consumer goods. It has been a long period of accumulating long-term debt to pay for short-term pleasures, and it appears about over.

Ben Bernanke is said to be an expert on the Great Depression. The contraction of the money supply during that era has convinced him that the thing to do in the face of a credit crunch is print money, ergo, his derisive moniker as “Helicopter Ben”–he’d drop dollars from a helicopter to keep the money supply from contracting.

Unfortunately, the analogy between now and the era of what Milton Friedman called the Great Contraction is not sound. During that period, the United States and all of its trading partners used metallic currency–either gold (mostly) or silver (a few). All that was required to see a contraction in the money supply was to see gold flutter out of the treasury, to be hoarded, or in payment of foreign debts. A reduced gold supply pushed the price of the currency up, which of course, yielded a reduction of prices for things bought w/ the currency, i.e., deflation.

Deflation, like its counterpart, inflation, has many positive (or if preferred, negative) feedback loops. If prices are going down, that depresses demand today as people figure they can wait to see how low prices will go, which feeds back into the price mechanism, driving prices down further, etc. Deflating prices, at least temporarily, artificially deflate demand. Inflation, i.e., a devaluing currency, works the same, but in reverse, artificially inflating demand until such time prices have adjusted to reflect the true value of the currency relative to output. In either case, the currency market is distorting the true economic picture.

Enter fiat currency, which is a piece of paper that is valuable because some government or economic entity says it is. It has virtually no intrinsic value (you could use it for wallpaper, perhaps?), and its marginal cost of production is very nearly zero. Thus supplies of fiat currency are not limited by geology, technology, etc., in the manner that the supplies of hard currency once were. The bias for central banks issuing fiat currency is always to err on the side of supplying a bit too much, instead of too little, because the feedback loops for rising prices (inflation) are viewed as less onerous than those for falling prices.

The problem with a fiat currency is determining how much is just a bit more than enough. Since fiat currency represents the output of goods and services created by the economic system that printed it, a good place to start looking in evaluating whether too little or too much is issued would be its price in foreign currency markets, because other economic systems dispassionately evaluate its worth relative to the output it represents. If a fiat currency is losing value virtually across the board internationally, this is a good signal that there is too much of it being created. Another place to look is to return to the future and look at the prices, in the fiat currency, of internationally-traded commodities, like oil, gold, etc., as in the days of metallic currencies. Again if these prices are increasing, it is another sign of too much currency.

Whither the fed, and today’s situation? The dollar is crashing, and commodities are screaming up. The fed must act quickly to decrease the supply of dollars, either via interest rate increases, or its reserve ratios, or whatever method it chooses, including identifying (hopefully for correction) some of the fiscal excesses of the past few months and years (e.g., Iraq, ethanold subsidies, implicit subsidies to Fannie and Freddie, etc.) I know that is counter-inuitive to what Bernanke is doing, but he seems to fear a deflationary spiral like the Great Contraction. If the US entered such a situation by dint of squeezing the money supply to bring down commodity prices and push up its foreign currency value, it could easily reverse course by just printing more money. It doesn’t have the necessity of finding new gold deposits or new technologies of extraction as was faced by the fed in the 1930’s. There is no real danger, in a fiat currency economy, of entering a demand-destroying deflationary spiral.

People will say, “but look at Japan in the ’90’s”. Yes, but Japan was and is a special case. It had enjoyed an inflationary spiral for many years as it strove to keep its currency from appreciating in foreign exchange markets in order to juice demand in its export markets. It paid the piper w/ the ’90’s deflation, as it could no longer buy enough Yen to artificially keep its forex price low. The impact was especially hard because at the same time, Japan’s population stagnated and began declining. What looked like a deflationary spiral and a contracting economy was at least partially an aging native demographic with hardly any immigration allowed. If the economy contracts less than does the population, then on a per capita basis, incomes are still growing, which has mostly been Japan’s case these last few years.

Thus Bernanke needs now to raise interest rates by at least about 200 basis points, and see what that does to the dollar and to commodity markets. If they settle down a bit, then leave them there for awhile to see what happens. Printing dollars is easy if need be. Finding and destroying them when too many are printed is somewhat more difficult and certainly more painful.

E is right and Faber is way off the plot.

Ben is not trying to generate GDP growth or juice the equity market. He’s trying to maintain liquidity so the entire system doesn’t fall apart.

Do they just put anyone with an opinion on TV? I suppose his accent makes him sound credible.

As for the dollar….it needs to fall further. And stay there. That or we could just continue to sell foreigner’s all our hard assets.

Samax

Excellent points, DonKei. May I add another? FDR’s confiscation of private gold holdings was an attempt to increase the money supply. After the confiscation I believe the price was increased by Government mandate to $35/oz, thus creating more nominal dollars. It didn’t work as intended because the feedback loop of bank lending was busted and stayed busted til WWII.

My point is that whether one uses a commodity financial system, ie Gold or a fiat paper system, either will work if there is DISCIPLINE.

Volker was despised and derided by the clamor of the Boeotians in 1982. I personally do not expect that kind of political will until well into 2010-2015.

Faber is a blow hard. It just isn’t that simplistic and Bernanke alone is not the solution, nor the problem. We have a board of governors that decides what action to take on interest rates and if any finger pointing merits discussion, it is at the Fed as an entity. Now, isn’t the real issue here that currencies really don’t cause economic ebbs and flows, versus reflect what occurs in the global economy? I think the real story here is that a countries economic asset is it’s ability to consume, produce and balance the two profitably. The US is the largest owner of consumption in the world economy and that is changing but to think for a second that the US can directly impact itself from inflationary sources outside of its political boundaries is a long shot. What we can do is preserve our ability to consume until global parities resume a more stable nature. In the end, its net growth that matters. If we slow down we run the risk of entering a period of real negative growth. I’d rather see the GDP stay positive than the currency retain strength.

Fred,
Pass the bong. Seems you’re lit up and a little peckish today.

Like the old ads “go get tomorrow, today.” I think we’ve all done that already. Time to PAY UP.

A bear quoting a bear. Maybe for added excitement you can have a bear quoting another bear quoting another bear

Oh, max?

By the way, the Florida Supreme Court ordered a statewide recount in the Bush v. Gore case. The U.S. Supreme Court issued an injunction that put a stop to the recount. Three days later they said that there was no way for Florida to implement a recount in time to meet the safe harbor deadline. Too bad the recount had been stopped, you know, that was a terribly inconvenient thing.

They said the recount would violate the equal protection provisions of the 14th amendment. They also said that the decision was “limited to the present circumstances, for the problem of equal protection in election processes generally presents many complexities.”

If that fits your definition of “letting Florida decide”, then I’m not quite sure what language you speak.

Sorry Barry, but when I see this right-wing revisionism I can’t help myself……..

Well, a crisis for me is when I tell everyone to buy JC Penny and then it drops 5 bucks, or Thornburg Mortgage…sorry about those two calls…and all the others.

No…..the exaggeration was that we will “decouple” or “contain” this mess…while still growing at any cost. Well the GDP numbers “say” we are still growing…..What is the overall cost of that growth? Destroying capital faster than we can create it.

This IS different than the last time but by no means is it a good difference.

I’d say that forced selling because of margin calls is but the tip of the iceberg at this point. Carlyle missing it’s margin call means that the top 1% can no longer deny or ignore reality.

It has FINALLY hit a place where it might matter…….

Ciao
MS

Barry: “Yeah, I can see and hear this on the Dell in the office, but not on the iMac at home . . ”

I watched this at home on my Mac G4, OSX 10.3.9, on Firefox.

Michael –

Saying the downside “IS” different than the ‘last’ time, is kind of like the perma-bulls who said this last time “was” different….right? Barring Armaggedon, things revert to the mean. The world will adjust to better managed credit and less leverage overall. The world you are talking about is the one where suits in NYC and London buy things with 10x leverage and really don’t have to work for yield. Folks have to get used to having to work for their returns going forward – yes, alternatives will be one of the few places to have alpha….

DonKei,
I think you are probably correct about 2012. What we haven’t seen yet is wage inflation, the cost push which we should get over the next few years. A hoarding mentality is still not here.

Nixon did take us ‘formally’ off the gold standard but by 71, it was a farce anyway.

You could buy gold in the 60’s in foreign countries. If I remember correctly, it traded between $60 to $80 dollars an ounce in Europe. I actually bought some dental gold under the table from a friend. Dentists and jewelers were some of the few who could legally own it back then.

I remember the 70’s all too well. Not a fun time. We muddled through then and I just hope we get through this period without too much anarchy. If we don’t, we’ll have to bring the Guard back from Iraq to patrol our cities.

Coin collectors have always been able to own gold. Coins in crappy non-collectible condition sold at the bullion price. My dad had a number of them, bought legally and openly from dealers.

“Yeah, I can see and hear this on the Dell in the office, but not on the iMac at home . . .”

Yeah, same here.