The View From 1776

The Fed and the Phillips Curve

Read The Fed Must Strengthen the Dollar in the Wall Street Journal.

Posted by .(JavaScript must be enabled to view this email address) on 04/29 at 09:38 PM
  1. Fractional banking requires some inflation for the asset base of a 10 to 1 ration of loans to assets. With some inflation, asset depreciation, which would reduce the loans available is overcome with a "little inflation." That is why the Fed shoots for 1-2% inflation. Over time that is a large amount.

    When homes started losing value, we saw how asset depreciation started undermining all lenders, whether in sub-prime or not. Toss in derivatives that were some times using as much a 50 to 1 asset base or more, and you see how that morphed so quickly into a disaster.

    The dollar was collapsing in 1971 and we made a deal (Kissinger was the deal maker) with OPEC to protect them if they would sell all oil in dollars. They were to become wealthy beyond their dreams and in return loan the excess back to the U.S.

    From then on we have used trade policies, wars, covert operations, IMF loans, and other policies to keep the dollar in demand. That demand for dollars is all that gives it value. We owe more than we own. Speaking of owe, Personal debt is about $13 trillion and city and state $2.2 trillion and Federal $10 trillion. Total of $25 trillion is twice what GDP is with corporate debt tossed in.

    I saw one figure that said it is actually 275% GDP but, since they didn't show the breakdown I will leave it at 200%. That doesn't include the $53 Trillion unfunded liability for entitlements.

    That is affecting the dollar's value. The fed has little power over the dollar anymore because they are pumping so much money into the world. M-3, which is no longer reported is tracked by private sources which have it about 15-17%. Add that the world is looking to decouple from the dollar and the U.S. and you have forces in play that the Fed has little influence over. Mainly G-7 nations are the dollar's ally.

    Look at the Chinese Yuan which is "controlled" and where we buy a lot from and you see that the dollar has been falling to it whether we do anything with rates or not, whether we have a growing or collapsing economy. That is because the Yuan was artificially low to the dollar so we could have cheap imports and they get lots of manufacturers coming to hire their people. Now, they have too much inflation to keep doing that and are raising the Yuan.

    Iran is a big factor, having switched from dollars to euro and yen for sales reducing demand for dollars and its value. Here is a chart on my forum that shows the value of the dollar to the euro as oil, first by Iraq was sold in euro, then the dollar again, then Iran's threat to sell in euros and then the sale in euros.

    Bottom line, our debt, desire by the world to end our power, our deficit spending, decaying economy, possible change in consumer spending for imports (decreasing demand), etc. may make having a strong dollar impossible. In fact some believe there is no way to keep it from eventually collapsing when other oil nations stop selling oil in dollars.
    Posted by JanPBurr  on  04/30  at  09:28 AM
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