James Pethokoukis

Politics and policy from inside Washington

Kudlow on Bernanke and the dollar

Aug 26, 2009 14:04 UTC

The great Lawrence Kudlow is skittish about Ben Bernanke’s seeming disinterest in a robust greenback:

I have never heard Mr. Bernanke proselytize for a stable-dollar currency value of money. Never. Of course, like any central banker, he says he’s for price stability. But the question remains how to get there and what model to use. Supply-siders like myself strongly support a price-rule model, where markets tell government what to do. But all too often it seems like Mr. Bernanke — who has been out there buying Treasury and mortgage bonds in a futile attempt to control their yields — prefers the model where the government tells markets what to do. This is a loser, as we have painfully learned in the past.

Paul Volcker watched gold in the ’80s. So did Alan Greenspan for most of the ’90s. But I don’t think Mr. Bernanke watches gold at all. And I don’t think he worries much about the fate of the dollar.

Or maybe it is time to shutter the Fed …

Jul 31, 2009 18:01 UTC

It took my pal John “The Professor” Tamny of RealClearMarkets about a nanosecond to respond to my blog column about Ron Paul’s plan to audit the Fed. He let loose with both barrels:

The Constitution empowers Congress to “Coin Money, and Regulate the Value Thereof”.  For Congress not to audit/control the Fed would be unconstitutional.  And while I don’t think we need physical gold backing every dollar as Paul wishes, this notion that the Fed needs to conduct “monetary policy” is absurd.

All we need is price rule whereby the dollar has a fixed, redeemable value.  Why we allow a bunch of academics with terrible track records do much of anything is beyond me.  We don’t need policy, we just need a dollar-price rule and that wouldn’t require the Federal Reserve. The Fed’s ability to create money at will has zero to do with economic growth.

Come on Jim, don’t go all statist on me.

Me: I am concerned that we wouldn’t get a dollar price rule but a Congress actively influencing monetary policy. I don’t want to trade Bernanke for Pelosi & Company. I would like a price rule, though.


Fed monetary policy is obviously becoming less and less important in a globalized world market where foreign investment can increase the domestic money supply. Eventually, as we have already somewhat seen, other countries will dictate our monetary policy, not us. See China.

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Ron Paul’s Dumb Plan to Audit the Federal Reserve

Jul 31, 2009 16:58 UTC

The Federal Reserve is at least partially to blame for the economic crisis. It left interest rates too low for too long, and laxly regulated the megabanks. Given this reality, or at least this public perception, it’s not surprising that there are plenty of economists and politicos with oodles of ideas for re-imagining the central bank’s role and function. (Linking its policymaking operations more directly to the performance of market metrics such as the greenback, bond rates, and commodities would be a good start.)

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Then there is Representative Ron Paul, a Texas Republican and libertarian who would rather imagine a fantasy world without a Fed. Throughout his political career, Paul has repeatedly called for the Fed’s abolition, preferring Congress to take full control of monetary policy and eliminate fiat money in favor of a gold-backed national currency.

Since Paul can’t eliminate the Fed outright, he’s trying to emasculate it. Impinging on, and eventually ending, the central bank’s independence is the purpose of the Federal Reserve Transparency Act, Paul’s bill which would “eliminate restrictions on audits of the Federal Reserve and open Fed operations to enhanced scrutiny.”

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And what’s wrong with a little more sunshine on the Fed? Nothing, many Americans apparently think. A Rasmussen poll finds that 75 percent “favor auditing the Federal Reserve and making the results available to the public.”

Now those results aren’t a big surprise given the public’s unease with the unprecedented measures the Fed has taken to bolster the economy, including the unpopular bailout of AIG. Another recent poll found that the Fed is the most unpopular government institution, ranking behind even the Internal Revenue Service.

This unease is also reflected in the nearly 300 House members who are supporting the Paul bill. It’s a worrisome level of congressional support that may be pushing Ben Bernanke to educate the public on what the Fed really does, for example through his appearance at a recent town hall meeting at the Kansas City Fed.

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Of course, most Americans surely don’t realize that the non-policy aspects of the Fed are already audited by the GAO, nor have they watched the Fed chairman’s twice-a-year testimony, once known as the Humphrey-Hawkins testimony, in front of House and Senate committees.

But Paul’s bill would go further. An audit would create an explicit and clear congressional assessment of the Fed’s performance. “Indeed, there would be no point to this proposal, given Humphrey-Hawkins, if it were not the intention of the bill’s proponents to exert congressional control of monetary policy decisions in a way that the Humphrey-Hawkins testimony alone does not allow them to,” argues Michael Woodford, an economics professor at Columbia University.

How might more influence be exerted? Economist Anil Kashyap of the University of Chicago thinks an audit suggests the GAO and Congress could force the Fed to supply all the background information that goes into an interest-rate decision and compel all members of the FOMC to share their individual thinking on any issue in real time. “The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy. That would be a disaster.”

The effect on the economy might not be so beneficial, either. Even if the result of the Fed bill is onlymore aggressive congressional questioning and criticism, financial markets might well fear the bank would start taking congressional wishes into account when making policy.

“If the markets and foreign investors perceive it that way,” says economist Michael Feroli of JPMorgan, “it could immediately push up borrowing costs even if the audits are only a symbolic increasing of congressional oversight of monetary policy.”

More congressional authority would more likely be biased toward pushing for looser monetary policy to bring down unemployment.  If Congress were full of hard–money guys like Paul, that would be one thing. But who really wants Nancy Pelosi and Barney Frank deciding when to tighten and ease? And right now do Americans really want global investors to start questioning the Fed’s commitment to low inflation and a stable currency, right as Uncle Sam is running up record budget deficits?

The economy is only now pulling itself out of recession. Paul’s bill, if successful, could send it back the other way.



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Why the White House may be forced to get tough on China

Jul 29, 2009 14:00 UTC

Might America and China be headed toward a falling out over currency issues as U.S. unemployment worsens? The always superinsightful Andy Busch of BMO Capital Markets makes a helluva point here (bold is mine):

Under the Bush administration, the US Treasury had a clear policy of pressuring the Chinese to change their currency regime that kept the currency stable and generated massive US dollar reserve accumulation. This structure created the massive imbalances between the countries and created worries that situation was inherently unstable and dangerous.

Under the Obama administration, the US Treasury is not pressuring the Chinese and this was apparent during the meetings this week. President Barack Obama opened Monday’s discussions by declaring that the United States sought a new era of “cooperation, not confrontation” with China and that management of the U.S.-China relationship would be a major factor in defining the history of the 21st century according to AP.

This set the tone of the meetings to not upset the delicate fiscal and monetary paradigms that are in place. Treasury Secretary Tim Geithner made no mention of the Chinese currency regime nor of the detrimental effect it continues to have on global imbalances.

The irony is that the Chinese are the ones publicly stating that there are major concerns with the United States and the way the Obama administration and Congress are running their finances. After the Monday talks had ended, Assistant Finance Minister Zhu Guangyao said, “We sincerely hope the U.S. fiscal deficit will be reduced, year after year….The Chinese government is a responsible government and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets.”

So while the Chinese are sticking up for their workers, the US appears to be abandoning theirs. I wonder how long US manufacturers and US labor will continue to cooperate and not confront the Obama administration on this issue when unemployment breaches 10%?


…visualize this scene…

(grocery store, spoiled toddler Geithner wailing, writheing noodle legs, exasperated Chinese guardian)

“But I want you to float the Yuan! I won’t monetize the debt….I promise! You have to float the Yuan, you just have to!”

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Will Obama push for a weaker dollar?

Jul 7, 2009 14:21 UTC

Great catch by my guy Andy Busch, superstrategist at BMO Capital markets in Chicago. While Laura Tyson’s remarks about a secoond stimulus package are getting all the play, she also had a lot to say about the dollar:

If that comment by Tyson wasn’t disturbing enough, she went on to say that the US dollar ought to decline in the longer-term on a trade weighted basis.  Tyson believes the US should focus on generating exports and that a lower US dollar would aid in this venture.  While the FX markets ignored her commentary, I would wager that China and Russia did not.  Given that she was speaking in Singapore and in their backyard, I would say they must feel their worst fears are getting confirmed.
First, she’s advocating expanding the fiscal deficit beyond it’s current distended fiscal bloat.  Second, she saying the US should devalue its currency and therefore the value of the government bonds as well.  For a foreign holder of US dollars and US government securities, could you have possibly said anything worse?  Maybe, she could have said that the health care bill will put a 4% surcharge tax on wage earners over $200k.  Oops, that’s what’s being floated by Congressional Democrats now.
As the summer wears on and discontent grows, I expect calls will be louder and louder for additional stimulus from Congressional Democrats to put more Americans to work.  I also expect the bond market to become more volatile as the Congressional Budget Office calculates the effects of health care, energy, and the current spending on the deficit.  If more Obama officials talk down the US dollar, we’ll create the risk of a fall exit that will neither create jobs nor boost the economy.

The likelihood of hyperinflation looks much more real.

Inflation vs. Hyperinflation, Nathan Lewis http://www.realclearmarkets.com/articles  /2009/07/06/inflation_versus_hyperinfla tion_97294.html


“I used to think that hyperinflation and inflation differed only in magnitude. However, a friend pointed out that they could be considered as arising from different processes. “Inflation” is often something done primarily for economic reasons, as a sort of “stimulus.” “Hyperinflation” has, as its root, the policy of printing money to pay bills and debts………”

“……….Where are we today? I have a funny feeling that we have already crossed the Niemen, as far as hyperinflation goes. Although the various money-printing schemes that have arisen since autumn of last year have been justified on “stimulus” grounds, they are looking more and more like a funding mechanism (including funding for bank bailouts). They have a can’t-go-back quality about them. Banks can’t take any more garbage on their balance sheet, so the bank swaps are likely to stay for now. The purchases of Treasury and GSE debt could be reversed, but that isn’t likely to happen as Ben Bernanke is not the kind of guy to dump a trillion dollars of paper on the market while the Treasury itself is trying to dump another trillion-or-two on unsuspecting bagholders. A bear market in bonds would be confirmed, which is not such a big deal itself but not considered acceptable right now. The double-whammy of higher Treasury rates and higher GSE/Treasury spreads (likely if there is selling of GSE debt) would mean another 100-200bps on mortgage rates, which would blow up whatever housing-related “Green Shoots” we have been fantasizing about recently. Instead, I think the Fed is going to continue to purchase Treasury bonds at the regular auctions, and probably in size larger than the $300B they talk about publicly. The more they do this, the less that regular purchasers (notably foreign governments) are interested in buying this debt………”

“……………..People tend to fixate on the clownish final stages of hyperinflation, when they’re buying bread with bundles of billion-dollar banknotes. Actually, the damage is done much earlier. The first 10:1 decline in currency value is the worst, especially if it happens in a brief period like two years or so. (It would take about a 10:1 decline to produce a CPI of 26%+.) The second 10:1 decline, over another couple years, pretty much obliterates whatever remains of a financial system. That adds up to a 100:1 decline, or a 99% fall in the value of the currency. After that, it’s all just comic book madness.”

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