Sorry Ben, the Buck Stops with You
During his testimony before
Congress this week, Ben Bernanke didn't hesitate to opine on
a number of topics that had very little to do with his mandate
as Fed Chairman. The wealth gap, racial factors in income inequality,
and the impact of capital gains tax policy were all fair game.
But when queried about the one issue where his impact is unrivaled,
the value of the U.S. dollar, the Chairman quickly passed the
buck to the Secretary of the Treasury. Conveniently, the Secretary
was nowhere in sight.
Why defer to the Secretary
of the Treasury? Other than signing the bills, what does he have
to do with monetary policy? As a member of the Cabinet, the Secretary's
job is to advise the President on economic matters, manage the
finances of the United States, help plan the budget and oversee
appropriations. He has no control over either money supply or
interest rates. That power was delegated to the Fed in 1913.
Potentially, the Treasury Secretary could authorize using our
meager foreign exchange reserves to buy dollars, but given our
limited bank account of foreign currency, such intervention would
be more embarrassing than effective. There is literally nothing
the Secretary can do except repeat the useless mantra "A
strong dollar is in our national interest."
Second, Bernanke correctly stated that a higher yuan would create additional purchasing power in China, resulting in a higher percentage of China's resources being devoted toward satisfying domestic rather than foreign demand. The Chairman neglected to mention however, that such a re-allocation would result in fewer exports to the United States and higher prices for American consumers.
So if China actually adopted Bernanke's suggestions, the result in America would be that both consumer prices and interest rates would rise. For someone who claims to be worried that inflation will fail to moderate or that the subprime problems might spread to the overall housing market and the economy, it seems odd that Bernanke would encourage China to take steps that significantly raise the likelihood that both scenarios occur simultaneously.
Finally, Bernanke dismissed concerns about the wisdom of favoring core inflation over headline by asserting that oil prices will soon moderate. Considering that oil prices rose another 2% during his two-day testimony, and that he and his predecessor have consistently underestimated oil prices for years, what now makes his crystal ball any clearer? Also during his two-day testimony the dollar fell to new lows against most currencies and gold prices rose $15 dollar per ounce. Bernanke may claim that inflation is under control, but $76 dollar oil and $670 gold suggest otherwise.
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
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