The Dollar Bulls’ Chicken Dance Is About To Come To A Crashing End

For the past few days, the dollar bulls have been all full of “P&V” (a technical term I learned from my Irish granddad). We’re talking chicken dances here. I think we even saw a bunch of traders down in the CME pits doing the wave.

And why not? After falling more than 3% in the first three weeks of October, dollar futures have managed to pick up almost 2% in a matter of days. Smells like a bottom to the bulls, all right!

They have had a little help, mind you. Washington’s cheerleading squad continues to jawbone the prestige of a strong dollar. “A mighty country like ours deserves a currency people respect.”

“We Get the Government We Deserve” - Alexis de Tocqueville

Ben Bernanke has virtually guaranteed us that if and when he ever sees this “inflation thing” we speak of, he would immediately form a committee to think about it a lot. (He has lots of tools, you know.)

Besides, isn’t the recession all but over (even if those half million newly unemployed folks didn’t notice their sudden good fortune)? Surely we don’t need to keep printing dollars at such an astounding rate?

Isn’t Paul Volcker part of the president’s kitchen cabinet? One imagines that he’s pounding the table, demanding we take away the punch bowl soonest. Heck, even Barron’s requested a rate increase - in 48-point font on its front cover no less!

The days of profligate dollar destruction must finally be at an end!

Perhaps Not

If there is one lesson most every administration since Charlemagne has learned, it is a hell of a lot harder to turn off the cheap money tap than turn it on. The minute you move in that direction, the hotline starts ringing of the hook with calls for the cheap liquidity Wall Street craves.

(”Hotline.” That’s sooo old school! These days, I suspect that Tim Geithner’s personal cell phone just chimes Lloyd Blankfein’s favorite pop tune.)

An example of what I mean…

Despite claims that we are finally sailing into calmer seas (usually made by guys in dark alleys flogging shares of AIG (AIG)), many American financial institutions are still very much in the soup. Just this week, GMAC Financial Services was forced to turn to Washington for yet another massive injection of capital.

Failing the Test

Let me bring you up- to- date on the backstory: Taxpayers have already bought up about 35% of GMAC, at a cost of some $12.5 billion . Then the FDIC turned a blind eye to GMAC’s junk-rated credit, and allowed it access to FDIC’s debt guarantee program.

Despite that largesse, GMAC is continues to post ever-wider quarterly losses. And now, we hear that GMAC has failed its “stress test,” and will require both another $5.6 billion direct injection (probably in the form of an additional stock sale to Washington) as well as $2.9 billion more in loan guaranties from the FDIC.

(Wait a minute: Make that the “dead broke” FDIC, which is currently asking any and all surviving banks to pay it the next few years’ insurance premiums in advance.)

Imaginary Money

There are sooo many different ways of injecting trillions of new dollars into the system without the very public act of actually “printing money.” Indeed, Washington has actually bragged at great length about its “creativity and imagination” when it comes to inventing capital from whole cloth - without ever understanding that it is this very creativity that has bankrupted the quality of our capital.

I love it when my young daughters show creativity. But when our central bankers prize imagination over stolidity, we end up with imaginary dollars in our bank accounts. And if you were to want to buy something real like oil (up 21% since September) or gold (up 53% in the past 12 months), you have to stack up so, so many of those imaginary dollars before anyone will take you seriously. (And serious is the best you can hope for, as respect is long gone.)

Oh, and as for that “big spike” all the dollar bulls are so pleased with? If you take a gander at a slightly longer time-scaled chart, you would see that this little rise was nothing more than a short-term cyclic rise that took us to the top line - and third rail - of the dollar’s long-term falling trend.

Like I said: Respect for the dollar has left the building.

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Comment by mthomas

2009-10-29 13:28:05

I agree, the entire concept of printing one’s way to prosperity is wrong and immoral. There are always consequences for engaging in unproductive exercises, and we are suffering through those now. And I just read a few really good articles on this topic at http://www.goldalert.com which discuss the history of monetary policy in the U.S., including the Federal Reserve’s role in trying to create inflation, as well as the relationship between the dollar, the gold price, and some gold mining companies that should continue to benefit from a rising gold price. One I found particularly helpful is called “Gold Price Up, Dollar Down - Does It Really Matter?”

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