Is the U.S. Dollar on the road to becoming worthless?
"The inflationary effects of the zero-interest-rate 'cure' will be worse than the pain the Federal Reserve aims to prevent.
REMEMBER THE LIMBO? A CROSS BETWEEN A DANCE and gymnastics, it had participants bending over backward to maneuver under a horizontal stick. Only their feet could touch the floor. Anyone touching the stick or falling backward onto the floor is out of the game.
As Chubby Checker asked in his 1962 hit single 'Limbo Rock': 'How low can you go?'
New lows have recently been recorded in interest rates, house prices, oil prices, other commodity prices and much more -- not least the value of the U.S. dollar.
The financial authorities of the United States are pretty good at this game. They can bend their knees and twist their torsos to get under the bar. They stand up and challenge for the next round: 'How low can you go?' Many of us aren't so skilled. We can't go much lower. Soon we'll touch the bar, or fall flat on our keisters.
The U.S. Treasury and the Federal Reserve, those codependent arbiters of prices and quantities of money, will be hard to beat. They can go as low as they choose. They can even go below zero.
As Fed Chairman Ben Bernanke warned us -- or assured us -- back in 1999 when he was still an academic and New York Fed adviser: 'The monetary authorities can issue as much money as they like.' His point was to demonstrate that sufficiently dissolute monetary authorities can raise prices and increase aggregate demand.
The question being posed is whether rising prices stimulate demand. It's true that there is, or there can be, 'money illusion,' the Keynesian term for the notion that rising nominal prices and rising nominal wages make everybody happy and productive, at least for a time. But that time may be short. In the longer run, making money worth less is a step on the road to making money worthless.
The U.S., of course, is several steps down that road. Gold is not a good touchstone for short-term changes in the value of money, but over a long term it offers a good first approximation. Dollars that bought one-thirty-fifth of an ounce of gold from 1933 to 1973, last week bought one-eight-hundred-and-twenty-seventh of an ounce.
Taking another step down the road to worthless money last week, the Fed said: 'Over the next few quarters, the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.'
Is this a new clause in the U.S. Constitution? 'The Fed can buy anything, as conditions warrant.'
Economist Ed Yardeni provided ample analysis the other day: 'After one bubble bursts, the only way to get out of the resulting recession, and to avoid a depression, is to create another bubble by lowering the cost and increasing the availability of credit, particularly for housing.'
The deflationary impulse avoided in 2002 is more powerful in 2008. We are on the road to paying the price for two recessions at the same time. Or worse, we are on the road to avoiding most of the effects of a second recession."