Saturday, May 13, 2006

Good News, Maybe? And a Comment About the Fed

The trade deficit is narrowing. The question is: Is it the beginning of a trend or is it a glitch? (tradingmarkets.com.) It certainly makes sense, given the falling foreign exchange value of the dollar. Too bad it risks turning from a slow fall to a free fall, sometimes called a "flight from the dollar," the result of stampeding dollar speculators leaving the scene. If Bernanke can resist his instincts to drop money onto the economy and keep rates elevated, maybe it won't be catastrophic.

It just occurred to me: Maybe the Fed has been trying to lower the exchange value of the dollar with all of their credit-pumping. I mean, they did look surprised that all of their dollars came back as what they call a "global savings glut."

It's true, as our classicist John Stuart Mill states, there are two things that control prices and money flows: The market, with its supply and demand, and cost of production, but also another factor that he calls "Custom." The world has gotten into the custom of dealing with (and turning to their advantage) the US's strong dollar and economy. (There is also the fact that central banks and large banking institutions have gotten into the currency speculating business.)


[Thanks to utilitarian.net for the drawing. I can't resist noting in passing how much Professor Mill and my father E.C. Harwood look alike.]

In the past, this custom has served foreigners well, as US assets have tended to retain and even increase in real value. Today, however, -- in fact, for some decades now, the dollar has been approaching the status of "just another currency," subject as all currencies are not only to a people's productivity (as great as ours is), but also to the interference (otherwise known as "oversight") of their leaders.

So do you suppose the Fed thought they were encouraging the world to lower their customary expectations of a strong dollar by pumping money into the system? ... Nah. They're too smart not to realize it would backfire. So what was their motive? Beats me.

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