Saturday, 11/10/2007 10:59
If the US won’t swap Dollars for gold, the rest of the world will just have to make the exchange itself…
THE PRESIDENT of FRANCE went to Washington this week. He spoke to Congress en Français and told the United States to stop dumping Dollars on the rest of the world, risking a global financial crisis.
Zut alors! Sounds just like old times…
“The Dollar cannot remain solely the problem of others,” said Nicholas Sarkozy before a joint session of Congress on Wednesday. He was riffing on the (infamous) joke made by John Connally, Treasury Secretary to Richard Nixon in the early ’70s.
Connally had told the world that the Dollar was America’s currency “but your problem.” Au contraire, replied Monsieur le President this week.
“If we’re not careful,” Sarkozy went on – apparently using “we” to mean both himself and the US Congress – “monetary disarray could morph into economic war. We would all be its victims.”
Ooh la la! Did Sarkozy need to take a little Dutch courage before speaking his mind to US legislators and wonks? (As the Belgian news anchor in this clip from June’s G8 summit puts it, M.Sarkozy only ever drinks lots of water.) Telling the US to take responsibility for its actions – and its currency – is a gambit for only the brave.
It weighs heavy with history, too. “What the United States owes to foreign countries it pays – at least in part – with Dollars that it can simply issue if it chooses to,” barked French president Charles de Gaulle in a landmark press conference of Feb. 1965.
“This unilateral facility contributes to the gradual disappearance of the idea that the Dollar is an impartial and international trade medium, whereas it is in fact a credit instrument reserved for one state only.”
De Gaulle did more than simply grumble and gripe, however. Unlike Nicholas Sarkozy, he still had the chance to exchange his dollars for a real, tangible asset – physical gold bullion – at the Federal Reserve.
Gold “does not change in nature,” de Gaulle reminded the world in that 1965 speech. “[Gold] can be made either into bars, ingots, or coins…has no nationality [and] is considered, in all places and at all times, the immutable and fiduciary value par excellence.”
How to collect and hoard this paragon of assets? Back in the 1950s and ’60s, world governments could simply tip up at the Fed, tap on the “Gold Window”, and swap their unwanted dollars for gold.
So that is exactly what de Gaulle did.
Starting in 1958, he ordered the Banque de France to increase the rate at which it converted new Dollar reserves into bullion; in 1965 alone, he sent the French navy across the Atlantic to pick up $150-million worth of gold; come 1967 the proportion of French national reserves held in gold had risen from 71.4% to 91.9%. The European average stood at a mere 78.1% at the time.
“The international monetary system is functioning poorly,” said Georges Pompidou, the French prime minister, that year, “because it gives advantages to countries with a reserve currency.
“These countries can afford inflation without paying for it.”
In 1968, de Gaulle then pulled out of the London “Gold Pool” – the government-run cartel that actively worked to suppress the Gold Price, capping it in line with the official $35 per ounce ordained by the US government. Three years later, and with gold being air-lifted from Fort Knox to New York to meet foreign demands for payment in gold, Richard Nixon put a stop to de Gaulle’s game. He stopped paying gold altogether.
De Gaulle called the Dollar “America’s exorbitant privilege“, repeating a phrase of his favorite economist, Jacques Rueff. This privilege gave the United States exclusive rights to print the Dollar, the world’s “reserve currency”, and force it on everyone else in payment of debt. Under the post-war Bretton Woods Agreement of 1946, the Dollar could not be refused.
Indeed, alongside gold – with which the Dollar was utterly interchangeable until 1971 – the US currency was real money, ready cash, the very thing itself. Everything else paled next to the imperial Dollar. Everything except gold.
“Printing a $100 bill is almost costless to the US government,” as Thomas Palley, a Washington-based economist wrote last year, “but foreigners must give more than $100 of resources to get the bill.
“That’s a tidy profit for US taxpayers.”
This profit – paid in oil from Arabia…children’s toys from China…and vacations in Europe‘s crumbling capital cities – has surged since the Unites States closed that “Gold Window” at the Fed, and ceased paying anything in return for its dollars.
Now the world must accept the Dollar and nothing else besides. So far, so good. But the scam will only work up until the moment that it doesn’t.
“The US trade deficit unexpectedly narrowed in Sept.,” reported Bloomberg on Friday, as “customers abroad snapped up American products from cotton to semiconductors, offsetting the deepening housing recession that is eroding consumer confidence.
“Exports have reached a record for each of the past seven months, the longest surge since 2000,” the newswire goes on, which “may help explain why the Bush administration has suggested it’s comfortable with the Dollar’s drop. It has declined in all but one of the past five years, even as officials say they support a ‘strong’ Dollar.”
What Bloomberg misses, however, is the surge in US import prices right alongside. They rose 9.2% year-on-year in October, the Dept. of Labor said on Friday, up from the 5.2% rate of import inflation seen a month earlier.
Yes, the surge in oil price must account for a big chunk of that rise – and the surge in world oil prices may do more than reflect Dollar weakness alone. The “Peak Oil” theory is starting to make headlines here in London. Not since the Club of Rome forecast a crisis in the global economy in 1972 have fears of an energy crunch become so widespread.
But if you – an oil producing nation – were concerned that one day soon your wells might run dry, wouldn’t you want to get top dollar for the barrels you were selling today? Especially if the very Dollar itself was increasingly losing its value?
“At the end of 2006, China’s foreign exchange reserves were $1,066 billion, or 40% of China’s GDP,” notes Edwin Truman in a new paper for the Peterson Institute. “In 1992, reserves were $19.4 billion, 4% of GDP. They crossed the $100 billion line in 1996, the $200 billion line in 2001, and the $500 billion line in 2004.”
What to do with all those dollars? “If all countries holding dollars came to request, sooner or later, conversion into gold,” warned Charles de Gaulle in 1965, “even though such a widespread move may never come to pass…[it] would probably shatter the whole world.
“We have every reason to wish that every step be taken in due time to avoid it,” the French president advised. But the step chosen by Washington – rescinding the right of all other nation-states to exchange their dollars for gold – only allowed the flood of dollars to push higher.
Nixon’s quick-fix brought such a crisis of confidence by the end of the ’70s, Gold Prices shot above $800 per ounce – and it took double-digit interest rates to prop up the greenback and restore the world’s faith in America’s paper promises.
The real crisis, however – the crisis built into the very system that allows the US to print money which no one else can refuse in payment – was it merely delayed and deferred? Are we now facing the final endgame in America’s post-war monetary dominance?
If these sovereign wealth funds – owned by national governments, remember – cannot tip up at the Fed and swap their greenbacks for gold, they can still exchange them for other assets. BCA Research in Montreal thinks that “sovereign wealth funds” owned by Asian and Arabian governments will control some $13 trillion by 2017 – “an amount equivalent to the current market value of the S&P500 companies.”
And if China doesn’t want to buy the S&P500 – and if Congress won’t allow Arab companies to buy up domestic US assets, such as port facilities – then the sovereign wealth funds will simply swap their dollars for African copper mines, Latin American oil supplies, Australian wheat…anything with real, intrinsic value.
They might just choose to Buy Gold as well. After all, it remains – “in all places and at all times…the immutable and fiduciary value par excellence,” as a French president once put it.
Charles de Gaulle also warned that the crisis brought about by a rush for the exits – out of the Dollar – might just “shatter the world”. It came close in January 1980. Are we getting even closer today?
Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London’s top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian’s views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany’s Der Stern; Italy’s Il Sole 24 Ore, and many other respected finance publications.
See the full archive of Adrian Ash articles on GoldNews.
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14:58if you’re looking ahead of the elections15:00do you think that the outcome of the15:01elections either way15:03would influence foreign policy going15:05forward and as a result15:07foreign countries decisions to hold more15:09or less gold15:11absolutely i mean we’re working on a15:13report right now15:15on the implications of the election for15:17for gold and precious metals15:19uh and you have like four different15:22scenarios on how things15:23shake out but definitely i mean you know15:26this15:27administration has um15:30excelled in its ability to reduce the us15:34stature around the world15:36and to create hostile relationships with15:39countries around the world15:41it’s had a negative effect on cpm group15:43because15:44there are people who don’t want to deal15:46with u.s companies15:49and and so i think a change in the15:51administration15:53while it wouldn’t be a 180 degrees turn15:55because15:56there are people in the democratic party15:58including joe biden15:59who will probably retake retain would16:02retain16:03some sort of hostile posture toward16:06china16:06it may be less hostile than the current16:09one and it may be less hostile toward16:11canada16:12and and other countries around the world16:15so you should see16:17if you saw a change in the16:18administration and a change in the16:20senate16:20you should see some improvement in the16:23u.s relations with16:25the rest of the world but there’s been a16:27tremendous amount of damage16:30done to the u.s stature globally16:34and it’s probably not going to get16:36changed by one16:37by a change of government for four years16:40do you think the us dollar then going16:42forward could lose its status as a de16:45facto reserve currency of the world16:47because you see another currency16:49challenging that status16:51as i said the part of the problem is16:53that the u.s owes the world so much16:55it owns it we have 62 percent of16:58monetary reserves17:01the u.s dollar will lose its stature17:04as the reserve currency in the future17:08the future may be 50 years from now and17:12it is it not it is reversible17:15this could not happen if the u.s17:18government got its act together but i17:19have17:20no hopes for that well if the u.s if the17:23u.s loses that status17:24who’s what’s going to take over who or17:26what well i was getting to that17:28as i said earlier most central banks in17:31the world17:32see as an ideal a multi-polar17:36international currency regime they17:38understand that it will take17:40decades to get there because of the17:42imbalance and liquidity between the17:44dollar and17:44all of the other currencies in the world17:47yeah17:4862 percent of their money of their forex17:51is in dollars that means that there’s17:53only 38 percent and everything else17:55they have to slowly make that transition17:58away17:59no government wants to see18:02its currency replace the dollar as the18:05reserve currency18:06what they’d like to see is a multi-polar18:09international currency regime18:11where people are free and companies and18:14governments are free18:15and there’s sufficient liquidity in18:17non-dollar currencies18:19that you can own and hold a portion of18:22your wealth18:24in those other currencies a greater18:26proportion of it18:27no one like if you talk to the chinese18:29central bankers if you talk to18:31other central bankers in around the18:34world18:34no one expects the dollar to disappear18:37as a18:38quote de facto reserve currency18:41but they‘d like to see it disappear as18:43the de facto current18:45reserve currency but they’re fully aware18:48that this is something that’s going to18:50take decades to execute18:52if it can be done okay you brought up18:55china i’m surprised to see that china18:57was relatively low on the list18:59when you’re talking about their19:00percentage of foreign reserves19:02in gold holdings it’s only four percent19:04of the foreign reserves in gold19:06are you surprised at how low that number19:08is19:09no um i’m not surprised i19:12i should ask you why you’re surprised19:14that it’s high19:15but you know china that should the19:18people’s bank of china for19:20decades had a view that gold was a small19:22and insignificant portion of its19:24monetary reserves19:26it changed that view in 2015 at a time19:29when it rolled out19:30a massive acceleration of19:33its efforts to make the rmb19:37more of an international currency it’s19:39still not you know fully convertible19:41but they expanded the daily trading19:43ranges and they expanded the longer term19:45trading ranges that they found19:47acceptable on the rmb19:49they started encouraging rmb19:52bonds offshore being issued offshore19:56and they said okay we’re adding some19:59gold to our reserves and we’re going to20:01continue to buy gold because20:02we see gold as a small but significant20:05part of our monetary reserve policy20:08going forward20:08now this was in 2015 and it’s very20:11important to understand that that was20:13after 2008 and 2009 when the u.s20:16treasury20:17basically stuffed everybody else and20:20protected20:21the bankers or the executives at the20:23banks uh20:24in the us and and so this was a direct20:27reaction20:28to the inappropriate behavior that the20:31us20:32treasury had during the financial the20:34global financial crisis20:36uh and and the chinese central bank20:39basically said we have to accelerate our20:41effort20:42to help move toward that multi-polar20:45currency20:46regime that we all would like to see in20:48the long run20:50uh and so they started adding their goal20:52if you go back to 201520:54they probably had about 1.1 1.3 percent20:58of their reserves in gold so the fact21:01that it’s up to four percent21:02and the fact that they have like three21:04trillion dollars of dollar reserve21:06of of foreign exchange reserves means21:08that it’s going to be a slow transition21:10as they add gold to it and as i said21:12they’re very price sensitive21:14they pulled out of buying gold for about21:1615 months a few years ago21:18then they came back and they were buying21:20but then they pulled back at the end of21:22201921:23and they haven’t reappeared they said21:25you know in the past they said21:27we’ll buy gold below a thousand when21:29gold went over a thousand they21:31didn’t buy any gold for several years21:33then they increased their threshold21:35and they knew they were buying uh and21:37then when the price started rising this21:39year they said no21:40you know we’re going to wait finally21:41jeff with everything that’s happened21:43this year and in particular with the um21:46central bank activity or slowdown of21:48central bank buying activity21:49do you think the run-up of gold prices21:52to two thousand dollars21:53all-time highs has made sense to you do21:55you think valuations are21:57correct as they should be right now yeah22:00i think they are22:01uh you know obviously the trend of the22:04next year or two is going to depend on22:06several things the outcome of the us22:08elections for the senate as well as the22:10presidency22:11brexit is coming up the pandemic which22:14is getting worse in europe now and is22:16expected to get much worse in the united22:18states22:18there are a lot of negative factors22:20there uh that fully support the idea of22:23a two thousand dollar22:24gold price now i wouldn’t be surprised22:27to see the price of gold22:28spike up higher on a short-term basis uh22:31then maybe plateau depending on what22:33happens politically22:35uh but we expect higher prices later22:37like22:382023 2025 because22:41none of these things are being solved22:43would you have a long-term price target22:45in mind22:47we’re looking at a gold price that is22:50very significantly higher than it is22:53today22:54all right perfect jeff jeff i want to22:57thank you so much for uh speaking with22:58me today that was a fascinating talk23:00thank you for your time thank you for23:02your time23:03and thank you for watching kiko news23:05we’ll have much more coverage for you23:06at the denver gold form stay tuned23:34you
@RaoulGMI identified the following factors contributing to a crisis, before Coronavirus:
- Stocks: Largest Equity Bubble of All Time: (Pension Crisis & Buyback Bubble)
- Largest Retiree Wave, all wanting to sell stocks and bonds at the same time
- Millennials are too poor and indebted (make 20% less than parents)
- Corporate Credit: Largest Credit Bubble of All Time
- ($10 Trillion + Off balance Sheet = 75% of GDP)
- Student Loan Bubble:
- $1.6 Trillion
- Auto Loan Bubble
- ($1.2 Trillion)
- Indexation Bubble
- ETF/Market Structure Bubble
- Foreign Borrowings (Dollar Standard Bubble)
- Monetary Policy Bubble (The Central Bank Bubble)
- EU Banking Crisis
- why they hired Christine Lagarde, for her political negotiating skills to deal with the nationalization of the European banks (which are facing insolvency) not for her economic or financial skills
- A Trade War:
- The Trade Wars “shattered” supply chains
- Largest Supply & Demand Shocks of all Time
Central Banks have been fighting for the last 20 years:
- Full Scale Debt Deflation and a Solvency Crisis
- A loss of confidence in the Dollar Standard and the Entire Financial Architecture
In this video from VRIC 2020 Peter Schiff and Brent Johnson debate about the future of the fiat money specifically US Dollar and the gold standard.
Peter Schiff believes the US market has never been as overvalued and over priced. And one of the major warning signs is we blew up the private equity market. This decades dot.com bubble is the private equity market destruction. This destruction will lead to the decline of the US dollar and eventually a remonetization of gold as the dollar loses its place as the Worlds Reserve Currency.
Peter Schiff’s theory is that Central Bankers around the world are under the false impression that a cheap currency is a good thing because it allows them to export more to the United States. However, the US is broke and can never pay for what it’s buying.
And since America is the largest debtor nation in the world and have more debt than other major countries combined and manufacturing is such a small portion of the US economy, there is a complete dependency on foreign goods.
And Relative to Wealth producing components of GDP no other country on earth has as much debt as the United States.
Add in contingency guarantees such as bank accounts, pensions, brokerage accounts that the US government is committed to funding despite the lack of money to pay for these things.
Combine all of this together and there is the potential for a currency crisis the likes the world has never seen. Schiff thinks this because there is an unrealistic level of belief for the US Dollar.
Schiff thinks the dollar will perform worse than other fiat currencies around the world and that we’re going to remonetize gold as the central asset.
Brent Johnson ultimately believes the same ending but with a different theory on how it will all go down.
Brent’s theory is that MMT is that the government will spend more money into existence and the central banks will want to control of the monetary policy. And that the dollar will go up and people will continue borrowing and buying which will ultimately lead to a massive currency crisis.
Every country in the world has over leveraged their economy and Brent Johnson believes that Central Bankers in every country are making the same bad bets across the world.
Brent Johnson makes note of The Plaza accord and that it was put in place in 1986 to artificially weaken the dollar against the other worlds Fiats because it was too strong. He argues that the dollar will be the the worlds central currency until fiat fails.
Schiff’s theory is “Money Is Nothing” and the value is the production and real goods that a country has. Money just lets you divvy up whats been produced. The wealth of the nation is the productive capacity of that nation.
Schiff also believes that in order to have a strong country you need:
Which are things that the US severely lacks and will pay a massive price for the over dependence on countries that do have these things.
The Canadian economy will benefit from a resource and precious metals boom that will help the Canadian dollar.
Schiff on inflation: Inflation initially pushes up asset prices before consumer prices.
Brent believes that digital currencies could be the future of money and likely will be implemented by most countries in the near future.
Brent and Peter agree that The Gold Standard will happen after a general loss of confidence in fiat currency.
Schiff explains MMT Modern Monetary Theory as the practice of taking Quantitative easing to the extreme. Printing Money without creating prosperity. Democrats will rely on the central bank to fund their spending agenda.
Repo rates have spiked to 9% – the market wants rates higher but Americans have so much debt and American can’t afford to service the debt. And international banks have been accessing the FED repo market to a greater extent than the US domestic markets. Repo rates spiking shows a demand for funding from the US dollars.
Americans have so much debt that the US government has to keep rates low other
Marin Katusa postulates that the highest risk lies in the credit market with debt in triple BBB
But that argument can’t be applied to other countries targeted by Mr. Trump. Aaron Tornell, a Mexican-born economist at the University of California, Los Angeles, noted that since the 1980s, Mexico has turned away from left-wing isolationism toward liberalized markets and closer cooperation with the U.S. on trade and security issues such as narcotics. Advocates in Mexico of this integration argued American presidents and big business would prevent the U.S. from using its enhanced leverage to punish Mexico.
Mr. Trump’s policies could “destroy the political foundations of a country that has been following liberal economic policies for the last 30 years and give more power to those who want to be like Venezuela,” Mr. Tornell said.
But there is a real underlying risk that by deploying and using its economic weaponry so frequently the U.S. will, in the long run, drive others, friend and foe alike, away from its economic orbit. “These are not zero-cost options,” says Robert Hormats, former under secretary of state for economic affairs and an adviser on international economics for presidents going back to Richard Nixon.
Imposing tariffs on China and other nations trying to send their goods to the U.S. not only raises the prices of those products for Americans, it also gives targeted nations an incentive to develop markets, and long-term trade ties, in other countries.
At the same time, those foreign nations can retaliate by cutting purchases of American goods, or by slapping retaliatory tariffs of their own on American products, making them less competitive, as China has just announced it will do. The Chinese may find other countries to provide, say, wheat and soybeans, and in doing so develop lasting, non-American trade ties.
“If the U.S. develops a reputation as an unreliable supplier, countries will turn to our competitors, and, when sanctions end, earlier supply chains will be difficult to restore,” says Mr. Hormats.
.. Similarly, there is a danger the U.S. is providing both allies and adversaries an incentive to find ways around using the American financial system as the wiring for international commerce.
For now, there are few alternatives to using American banks for clearing international transactions. As a result, enemies find they can be shut out of much international commerce by crossing the U.S. and being slapped with American sanctions.
But it isn’t just enemies. Friends also know their companies can be isolated if they don’t heed American wishes to shut down commerce in countries on the American black list. The risk of losing access to the financial system is a powerful motivator.
Yet overuse of this threat could compel other counties—including the very allies whose cooperation the U.S. seeks in applying financial pressure to the bad guys—to find alternatives to using dollars and American banks. Mr. Hormats notes that this “is not easy to do now, given the dollar’s pre-eminent role, but over time such overuse could eat away at the dollar’s role and hence U.S. leverage.”
Indeed, there are signs that others are seeking alternatives to the dollar and the American-led financial network. The European Union is trying to set up its own payment system to allow oil companies and businesses to continue trading with Iran despite American sanctions. China has made clear it would be happy to lead a different international finance system and use its currency as an alternative to the dollar.
Similarly, 11 Pacific Rim allies have moved ahead with their own new trade bloc after the U.S. pulled out of the Trans Pacific Partnership trade deal.
America remains the big kid on the economic block, but it isn’t the only one. The danger is that it could come to be seen as the bully who tries to intimidate the other kids once too often, persuading them to join together to find ways around him.
Real income for America’s bottom 90% reached an all-time high in 1999, and at the time Pew Research found that 81% of Americans agreed that free enterprise was a major reason for the country’s success in the 20th century. By June 2015, however, Gallup reported 47% would vote for a socialist.
What happened? Real income for the bottom 90%, as measured for the World Top Incomes Database, declined after 1999 and never rebounded. Two terms each of Republican and Democratic administrations failed to end this stagnation, which says all you need to know about why Donald Trump was elected president. Now wages are rising at robust rates—above 3% a year—thanks to cuts in taxes and regulation, with the largest wage increases going to low-wage workers. And the Federal Reserve has been itching to raise interest rates.
The Fed still operates on the “professor standard,” enshrined with Bill Clinton’s nominations of pure academics. Their textbooks say strong economic growth, particularly strong wage growth, causes inflation, which Fed policy should temper. Both the Bush and Obama administrations perpetuated the professor standard, and both presided over incom
Ending that stagnation is one goal that unites the political spectrum. But do we really expect that to happen under the professor standard? The academics’ favorite tool, the Phillips curve, tells them wage growth that is too strong can cause an outbreak of 1970s-style inflation, as former Fed Chair Janet Yellen alluded in her 2010 Senate confirmation hearing.
I have a different perspective. The professor standard doesn’t work, and the Fed needs new voices to argue for an approach that does.
The 1980s and 1990s brought prosperity across the board. This success was driven by a voting bloc of Fed governors, such as Wayne Angell and Manley Johnson, who favored a stable dollar and were able to swing the consensus. The dollar is a unit of measure—like the foot or the ounce—and keeping units of measure stable is critical to the functioning of a complex economy. The result of their stable-dollar policy was prosperity.
.. Since the Federal Reserve Act of 1913, there have been three distinct periods of sustained dollar stability:
- 1947-70 and
During these periods, real growth of gross domestic product averaged 3.9% a year and real income growth for the bottom 90% averaged 2.2%, according to calculations done by Rich Lowrie, senior economic adviser to my 2012 presidential campaign. During distinct periods of sustained dollar volatility—in 1913-21, 1930-46, 1971-82 and 2000-15, real GDP growth averaged only 1.9% and real income for the bottom 90% declined by an average of 1.3% annually.
The prosperity of the 1980s and 1990s gave way to stagnation precisely because dollar stability gave way to volatility. Blame the professor standard. Demand for dollars is determined globally on a real-time basis, but the Fed has preferred to look largely at domestic lagging indicators in determining supply. The frequent resulting mismatches cause dollar volatility, which the professor standard then dismisses as transitory.
America’s future prosperity, and especially the end to income stagnation, depends on getting this distinction right. The Fed has the tools to stabilize the dollar. The open-market desk can buy bonds to counter a downward trend in commodity prices and sell bonds to arrest an upward trend, resulting in ongoing stability in the dollar’s commodity value. The only thing missing are voices like Messrs. Angell’s and Johnson’s to advocate for it. If confirmed by the Senate as a Fed governor, I will speak up for dollar stability.
Last September the professor standard led Fed governors to pick up the pace of quantitative tightening and stick to its plan of rate hikes. Never mind that commodity prices were falling, meaning the dollar’s commodity value was rising, a market signal of deflationary pressure. Meanwhile, the forward outlook for industrial production and retail sales indicated signs of slowing rates of growth. This combination of slowing growth and a rising dollar is a deflationary slowdown. These are the worst conditions under which to raise interest rates, yet that’s what happened, not once but twice, presumably because wage growth was deemed “too strong.”
Markets rightly sent the Fed a strong signal to back off, prompting three subsequent dovish pivots. If the Fed listens to markets after the fact, why not listen to them before?
This mistake is not new. Had the Fed responded appropriately to the dollar’s commodity value at the turn of this century, it wouldn’t have tightened the U.S. economy into the 2000 deflationary slowdown, and technology speculation would have resolved itself without taking down the entire economy.
Had the Fed reacted to the dollar’s commodity value coming out of that recession, it wouldn’t have inflated the real-estate bubble, which led to the 2008 financial crisis. After June 2008, the dollar’s skyrocketing commodity value was screaming that there was a sudden, huge, global scramble for dollar-based liquidity. Unfortunately, the market’s cry fell on deaf ears, apparently because the signal hadn’t yet registered in the Fed’s lagging employment and consumer-price indicators. This deflationary pressure ignited the financial inferno that began in September 2008, yet the Fed didn’t begin quantitative easing to put out their fire until that December.