The Ruinous Consequences of Dollar Assassin Ben Bernanke

Starting in the Bush Administration and continuing in the Obama administration, it has been the official policy of the United States to devalue her currency.   The one constant through this period has been the ascendancy of the bearded Princeton academic Ben Bernanke at the Federal Reserve Bank of the United States.   Consider the following chart:

cl_Monthly_2012.02.24

Crude was more or less stable until 2002 when Bernanke joined the Fed.  In response to the recession and to 9/11, Greenspan kept rates at or about 1% for an extended period from late 2002 to mid-2004 at the likely urging of Bernanke the “Depression Expert”.  Then after rates were somewhat normalized, though always behind the curve, in the period of the housing and commodity bubbles that the extended 1% rates caused, Bernanke took rates down to 1% in October 2008 and then 0% in December 2008 where they have been for the last 3 and a quarter years and where he has promised to keep them for nearly another 2 years until the end of 2014.  Note that late 2014 is actually after his current term expires in January of 2014.  With the only interlude in outrageous energy prices caused by the housing market crash, crude has been rising to the stratosphere since Bernanke joined the Fed and put his Helicopter Money speech out into the public consciousness shortly after joining the Fed.  Look at the Adjusted Money Supply as put out by the St. Louis Fed:

FedAdjustedMonBase1999-2012

Of course what you really want to know is what real yields have been or what short term real yields are relative to real GDP growth.  You can find Treasury Real Yields at the treasury Web Site.  Real yields have been negative for a year and a half on the five year and longer for shorter dated maturities.  This is what has been referred to as Financial Repression.  The Fed knows it has a captive audience of buyers that must buy only treasury paper and so they can manipulate rates until the yield is below the rate of “inflation”.

So what does this all mean for real people?  What it means is that we are screwing ourselves.  We are selling the things we make and produce here, like Grain at rock bottom prices to the rest of the world while paying through the nose for things they sell us, like Crude Oil solely because our government has, as a matter of policy, sought to weaken our currency for the last 10 years.  Look at the accumulation or Reserves in the table below which I took from the Motley Fool originally from RealClearMarkets and which is apparently sourced from the St Louis Fed:

Country

2000

2011

Increase in Reserves

% Increase in Reserves

China $159,038,687,803 $3,223,003,805,366 $3,063,965,117,563 1,927%
Japan $292,006,316,991 $1,261,806,392,299 $969,800,075,308 332%
Saudi Arabia $16,236,377,337 $542,251,631,922 $526,015,254,585 3,240%
Russia $8,912,404,690 $462,683,343,389 $453,770,938,699 5,091%
India $32,611,502,181 $280,841,457,954 $248,229,955,773 761%
South Korea $76,721,133,762 $309,525,522,361 $232,804,388,599 303%
Brazil $27,011,486,822 $225,698,628,128 $198,687,141,306 736%
Mexico $24,867,494,441 $91,022,221,778 $66,154,727,337 266%
Canada $28,502,732,205 $65,549,836,467 $37,047,104,262 130%
South Africa $4,689,819,832 $27,668,837,499 $22,979,017,667 490%
Australia $18,606,701,138 $40,433,356,875 $21,826,655,737 117%
Total $583,980,791,235 $6,155,409,675,210 $5,571,428,883,975 954%

As you can see, reserves have been rising fastest in China, Russia and Saudi Arabia, home to some very nasty rulers.  Why?  Because we have been paying them through the nose for goods in the case of China and Oil in the case of Russia and Saudi Arabia, as a result of our Weak Dollar Policy.  At the same time, that policy has made it cheaper for them to buy our foodstuffs – corn, wheat and soybeans – which raises the price worldwide and causes starvation and a declining quality of life even here in the US.  Why would they do this?  A number of reasons come to mind.  First, a cheaper dollar makes our exports cheaper in foreign currencies locally to the foreigners and so should boost our exports and hence GDP.  It also creates inflation in China as their currency is pegged to ours and so puts pressure on the Chinese to allow their currency to rise, also then helping our exports and slowing the drive to outsource manufacturing abroad at the expense of labor domestically.  But exports as a percentage of GDP are pretty small part of our domestic economy.  According to the World Bank, in 2010, exports represented about 13% of GDP in the US.  Consumption on the other hand is supposedly near 70% of GDP.  And so the Fed and successive administrations have engineered a declining dollar to help 13% of the economy at the expense of 70%?  Not a very good trade-off I would assert.

Where will this lead?  Well look at that chart of Crude oil again.  Notice the giant drop off in 2008?  Prices will rise until the economy cries uncle and activity slows or stops.  Prices will plummet. Then, if Ben Bernanke is still in charge, we will start the process all over again.  How did Eintstein supposedly define insanity?  Doing the same thing over and over again and expecting a different result?

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