by John M. Curtis
(310) 204-8700

Copyright May 23, 2009
All Rights Reserved.

            Sliding against the foreign currencies, the U.S. dollar hit new 2009 lows in part due to the Federal Reserve Board’s historic effort to add liquidity to frozen credit markets.  Called a once-in-a-century event by former Fed Chairman Alan Greenspan, the U.S. has reeled from a banking crisis not seen since the financial panic of 1907, where the stock market nearly collapsed.  Four years later, Congress created the Federal Reserve Board, modeled directly on the European Central Bank to assure a stable money supply to cash-strapped banks.  During the financial panics of 1873, 1893 and 1907, history repeated itself in 1929, where panicked borrowers withdrew savings, causing the liquidity crisis nearly destroying Wall Street.  When the stock market crashed in 1929, it became clear that bank holding companies could no longer play he market without catastrophic consequences.

            By 1933, the U.S Congress enacted the Glass-Steagall Act, creating the Federal Deposit Insurance Corporation, protecting depositors and prohibiting bank holding companies from risky stock market investing.  Glass-Steagall worked well until repealed in 1999 by the Gramm-Leach-Biley Act, opening the door for banks to once again engage in risky market investing.  Last year’s 60% drop in the stock market and banking liquidity crisis was directly related to once banned investing known today as “derivative” investing.  Unprecedented borrowing and bailouts of failed banks by the Fed, totaling over $10 trillion, has now devalued the U.S. dollar, driving up commodity prices like gold and oil.  When the dollar declines, it simply costs more to buy commodities, causing inflation.  While the Fed had to act aggressively to save the economy, massive borrowing devalued the U.S. dollar.

            European Central Bankers rejected supplying comparable liquidity into their national banks, leaving the system less leveraged than the U.S.  Added leverage results in higher borrowing costs and a dilution of value, whether it’s currency, in the case of nations, or public traded shares for corporations.  “The general theme today is clearly broad-based U.S. dollar weakness, largely triggered by mounting concerns over U.S. government debt AAA ratings,” said Omer Esiner senior market analyst at Travelex Global Business Payments in Washington.  Weakness in the U.S. dollar has resulted in a spike in commodity prices, especially gold and oil.  Higher oil futures translate into increased pump prices, fueling inflation in transportation costs.  Foreign investors have become reluctant to buy U.S. treasuries given their low yields and current devaluation of U.S. currency.

            Regardless of the sluggish pace of economic growth, Bernanke can no longer watch the dollar’s devaluation eat up foreign investments.  Raising interest rates makes U.S. treasuries more attractive to foreigners.  “Investors are coming to a realization that interest rates are heading higher and the dollar is going to be under pressure,” said Alan Lancz, president of Alan B. Lancz & Associates, an investment advisors firm in Toledo, Ohio.  Rising interest rates should stem the slide in the U.S. dollar, in part caused because other fixed interest rate investments are more competitive overseas.  Bernanke knew the trade-off of lowering interest rates:  Devaluing the U.S. dollar.  Devaluing the currency induces foreign investors to buy U.S. exports, reducing the U.S. traded deficit.  A weak dollar policy also keeps more capital inside the U.S., making foreign travel and goods more costly.

            White House economic advisors are watching commodity prices carefully, concerned that a sudden spike in pump prices could torpedo economic recovery.  During the reign of former President George W. Bush, oil and gasoline prices went through the roof.  He allowed ExxonMobil, Chevron Texaco and other big oil companies’ unprecedented profits during recession.  President Barack Obama can’t make the same mistake, allowing oil companies to profit at the expense of the economy.  Nothing causes more inflation and tanks the economy than high pump prices.  Big Oil already blames the recent run-up in pump prices on China’s insatiable appetite for fossil fuel.  Unlike Bush, Obama needs to be more vigilant keeping the oil industry from gouging consumers and tanking economic recovery.  Weakness in the U.S. dollar, not China, has caused the latest price spike.

            President Obama must continue stimulating the U.S. economy, even if it means increasing the money supply, more bailouts and growing the national debt.  Most economists agree that inflation is preferable to deflation, where commodity prices plummet because of a weak economy.  When the economy recovers and the Gross Domestic Product increases, the fraction of the budget deficit and national debt shrinks when compared to the overall economy.  When goods and services increase relative to debt, the dollar should eventually recover.  A weak dollar helps the U.S. economy during times of recession by giving more incentives grow exports and retain more business activity inside the U.S.  When Standard & Poors warned May 22 about downgrading Britain’s AAA credit rating, it raised similar concerns about the U.S., driving down the already weak dollar.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

©1999-2002 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.