Friday, November 26, 2010

Bernanke Disses the Dollar in Frankfurt

11/26/2010 Portland, Oregon – Pop in your mints…
Isn't Thanksgiving wonderful?  It has all of the warmth of Christmas with a fraction of the chaos.  Most everything is closed and, with the normal pressures of everyday life aside, you can truly sit and enjoy a large meal with your family and friends?  What a great holiday.
Ben Bernanke made a speech in Frankfurt at the Sixth European Central Bank Central Banking Conference which is causing a stir.  He titled it "Rebalancing the Global Recovery.  After parsing the text, some are calling it one of the most significant speeches that the man has made, right up there with his infamous "Helicopter" speech in 2002.  As some of you may recall, in 2002 Bernanke stated that, if deflation were to occur, he would use the electronic version of a printing press to create enough dollars to assure that there was enough liquidity in the dollar system.  He went as far to say that they could drop US dollars from helicopters if necessary.  The practice of dropping cash from helicopters in crisis situations may sound far-fetched.  However, here is a recent examples: 
More effective than TARP?
Ben Bernanke may be the most academically decorated man to ever chair the Federal Reserve.  He also, in our opinion, has no clue what money is.  At The Mint, we give Ben the benefit of the doubt in saying that he honestly does not have a clue what he is doing.  If it were intentional, it would be criminal on a very large scale.  For another example of clueless Central plann…errr banking, we look to the difficulty in applying the Basel accords in the Euro-zone.  It appears that each country identifies "risk" in their own cultural context which makes any sort of benchmark ratio analysis for Euro-zone bank balance sheets absolutely meaningless.
But we give him and the rest of the Central Bank hacks the benefit of the doubt because they have a system so simple that a monkey could run it.  Is the Unemployment rate high?  Lower interest rates.  Is inflation high?  Raise interest rates.  For all of the technical jargon and graphical analysis, the actions that are taken by a Central bank can be boiled down to this simple cause and effect.  The rest of the day they could play video games or eat bananas, etc.
The utter simplicity makes them so predictable.  Their predictability has made investing a very easy activity to undertake.  Short anything that depends upon the US Dollar gaining value (the currency itself or bonds that are repayable in dollars) and go long hard assets or commodities or anything tangible.  This recent trend has been in place technically since 2000 but really since 1913 in the US.  The difference now is that you can apply the logic on a global scale as all Central Bankers are doing the same thing!  The only two things that could reverse this trend in are:
1)      A lower stated unemployment rate (see our Key Statistics below for daily updates)
2)      A complete and utter breakdown of the existing world monetary system
Since the former does not appear to be occurring (recent "good news" is a product of seasonal hiring in the US) we are betting on the latter.  But the imminent complete and utter breakdown, as compelling as the evidence is, does not appear to be happening yet.  Big Ben's speech in Frankfurt could go a long way to further this process.
Where were we?  Ah yes, this speech that is gaining importance by the day.  In the speech, Bernanke appears to challenge the notion that the world's monetary system should be based on the US dollar being the reserve currency.  He admits the obvious in recognizing that the current system has no mechanism for alleviating the imbalances that have currently built up in it.  When you have a currency that is back by nothing, it technically never has to be settled.  There is the rub, the problem, and the reason that this system, which is causing more damage by the hour, will and must disintegrate. 
The world must remain in balance if it is ever to achieve peace and stability.  That balance must express itself in trade, and it can only be achieved through a stable currency and a solvent and free banking system.
Stay Fresh!
P.S.  If you enjoy or at least tolerate The Mint please share it with your family, friends, and colleagues!
Key Indicators for Friday, November 26, 2010
*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.