SliderOnTheBlack.com

I don’t know about you, but I’m getting awfully tired of listening to Ben Bernanke and Hank Paulson tell us about how strong the underlying fundamentals of the U.S. economy are, and how they stand firmly behind a “strong U.S. Dollar policy.”

All the while an alphabet soup of toxic credit instruments continue to implode all over the globe, with the U.S. Dollar still falling to new lows.

Does this look like a ” strong dollar” policy to you?

That was MZM from the St. Louis Fed’s own web site. Here’s the last chart they published for M3, before hiding it from the prying eyes of U.S. taxpayers.

And here’s a reconstructed M3 chart for you. Nearly a +20% year over year increase in money supply.

So much for “strong dollar” policy. And how about those “strong underlying fundamentals” in the U.S. economy? How about some real inflation numbers? This is John Williams excellent work from shadowstats.com:

And while we’re at it, how about some real unemployment numbers. You know, the kind without the outlandish birth/death rate “adjustments.”

Here’s what an all talk and no walk, “strong dollar” policy gets you…

“The Hanky Panky-Bernanke Buck”

And what does gold have to say about all this? Gold exploded almost immediately upon Bernanke taking office in February  2006, and hit new alltime highs earlier this year. Here’s a chart of the gold ETF since it’s inception:

And it will be much easier to pay off those deficits with “cheaper” inflated dollars.

Here’s an interesting quote from former Dallas Fed Governor Bob McTeer. This is from a March 21^st, 2008 post from his blog:

http://www.bob-mcteer-blog.com/the-dollar-weak-or-strong/

“For now, our weaker dollar serves us well in two principal ways.  First, by boosting our exports and discouraging imports, it provides a shot in the arm for our weak economy.  A smaller trade deficit will boost economic growth, and help us avoid or, at least, moderate a recession.  Second, we need to shrink our trade deficit in goods and services to slow the relentless flow of dollars abroad.

Each year’s deficit adds that much more to the huge dollar holdings of foreign central banks and others and means greater foreign indebtedness for the United States.  The persistence and size of our trade deficit also lead to calls for protectionism, a cure worse than the disease.

Normally, a trade deficit would adjust automatically through a decline in the dollar.  That hasn’t happened yet because the U.S. has been such a magnet for foreign investment.  Foreign capital inflows have kept the dollar too high for trade to adjust.  Only recently has the capital inflow diminished enough to allow the dollar to depreciate, and depreciation’s positive impact on our trade is just now beginning.  We shouldn’t interrupt that correction prematurely by trying to talk the dollar up, or by intervening in foreign exchange markets, neither of which helps for long anyway, if at all.

The dollar won’t fall forever.  The lower it goes, the sooner foreign importers, and, especially, investors will return to take advantage of the bargains.  At that point, the dollar will rebound, but hopefully from a sounder basis of more balanced trade.  So, I repeat my prayer:

 “Lord, give us a strong dollar, but not just yet.”

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While we may see another correction in gold, and gold stocks off the G7 jawboning… make no mistake about it, there is only one policy that Ben Bernanke and Hank Paulson have towards the U.S. Dollar, and the word “strong” ain’t in it.

…just ask Bob McTeer.

 SliderOnTheBlack

PS: What the U.S. economy, and the Dollar really need, is a shot of “Volckercillin.” And that will be the subject of my next post.