When politicians enact micro-policies which serve to inflate the dollar, it is the Fed's job to hold the dollar steady.
This is precisely the type of intrusion into the market that intellectuals insist upon trying, while doing so much damage in the process. Their contention is that Americans will be much better off if they pay greater value for what they buy, and receive less value for what they sell. Experience since 2004 shows the fallacy; we pay more and we get less, making the current account deficit much worse than it would have been otherwise. The Fed should be prohibited from changing the values of private assets based on its theories of what will be best for Americans. The Fed should be required to provide currency with stable value - period.
I suspect you ignore the actual flexibility of the value of the dollar. Real GDP versus nominal GDP tends to show that variance. Are you arguing for a "board" with no rules, then?
You are saying that the Fed is intentionally weakening the dollar as a "temporary inflationary measure."
If you've gotten that impression, it's wrong. The Fed is not "intentionally weaking the dollar for the sole purpose as a hedge against "temporary inflation".
By all its public statements I have seen, the Fed contends it is trying to strengthen the dollar and is raising the funds rate target for that purpose.
I concur.
My contention is that the higher funds rate targets, coupled with regular purchases of T-securities in the open market, have produced a weaker dollar and greater inflation.
This is, in fact, a true assessment. But will it result in the horrid inflation of the 60s? Not necessarily.
Long term, these actions are strengthening the dollar in real terms across all market sectors. Which ultimately results in the dollar buying more rather than less.
Are you of the view that the funds rate hikes are intended to weaken the dollar, as well as the economy?
No. We've just been through a vast growth in our economy. It is now time to take those goods and services to the market. To make those goods and services attractive to buyers, couching the market is a very important bit in balancing all trade sectors.
The reduced budget deficit produced by higher tax revenues, the low unemployment rate, increased incentives for investment - all these result from the well-advised fiscal policies of the Bush administration, specifically the 2003 cuts in marginal tax rates. Based on those 2003 tax cuts, the dollar was holding its value very well and interest rates were lower than today. But the Fed then insisted on raising the short-term rates, effectively increasing the costs of capital to consumers and small/medium businesses by at least 4.25%, a total effective drain of capital of at least $180 billion/year.
Are you against reinvestment in the American economy?
That Fed mismanagement countermands the supply side tax cuts, will eventually cause small/medium businesses to stop hiring, especially if the Fed decides to raise the short rate higher. If the rate goes higher, recession will follow and the dollar will weaken further. Then the Fed-induced cycle will start all over, but after great capital losses.
Your analysis posits that small/medium businesses owners have no concept of what to do with their profits. On the plus side, this downturn permits companies, using credits/incentives, to reinvest in their own human resources; to streamline their operations, to train new employees, to get a handle on their operations, in addition to reinvesting in their own company via expansion, streamlining, investing in stocks and options, purchasing related firms, etc.
Democrat economic policy is hopeless, almost, on both the fiscal and monetary side of the equation. That is why lost opportunities with a good Republican president are so distressing, due to inadequate economic advice.
I concur fully with you in re Democrat economic policy. I do not see where the President and the Feds are awry. All actions by Feds portray to me all the signs necessary to achieve a REAL solid improvement in the value of the dollar. The stage setting. Cooling the low percentage rates of housing loans, for starters. That had to happen. The whackiest kinds of loans were being created which put me in mind of the S&L scandals of the past. Now, whether or not you think this is good or bad depends upon which part of the market section you are viewing this from. The Feds are tasked with the job of bank sector solidity.
Per Friedman, inflation is "always and everywhere a monetary phenomenon." Congress' macro act was the 2003 marginal tax rate cuts, allowing the economy to grow faster by keeping more of its earned capital. The Fed always holds the key to stable money by draining liquidity to prevent the dollar from losing value. But the Fed has to act rationally, which it fails to do repeatedly.
I suspect you ignore the actual flexibility of the value of the dollar. Real GDP versus nominal GDP tends to show that variance. Are you arguing for a "board" with no rules, then?
You appear to admire the dollar's "flexibility" in changing value. I do not, because every change in the dollar's value burdens individuals and businesses with the task of adjusting prices and wages to maintain value. This is a great drag on economic growth. I am not arguing for a Fed with no rules. To the contrary, a money rule ought to be imposed on the Fed if it will not adopt one (presently the Fed uses what amounts to intuition to determine when it feels like the funds rate target has reached its "natural" level). The money rule ought to require the FOMC to drain liquidity by selling its Treasury securities until the gold price reaches $400/oz, and then add or drain liquidity as necessary to keep it there on a continuing basis.
If you've gotten that impression [that the Fed is intentionally weakening the dollar as a "temporary inflation measure"], it's wrong. The Fed is not "intentionally weaking the dollar for the sole purpose as a hedge against "temporary inflation".
Here is what you stated in a previous post: "Fed Chairman Bernanke made clear months back that this move FOR US exports would be occurring. For this to "occur", the dollar must drop, making our produced goods more attractive to the buyer." Are you saying the dollar "must drop" unintentionally?
This [higher funds rate targets are weakening the dollar and causing more inflation] is, in fact, a true assessment. But will it result in the horrid inflation of the 60s? Not necessarily. Long term, these actions are strengthening the dollar in real terms across all market sectors. Which ultimately results in the dollar buying more rather than less.
Respectfully, weakening the dollar as we have done since 1971 (the dollar is now worth a little more than five cents of the 1970 dollar) is not a recipe for strengthening the dollar over the long term. Particularly this is so when the Fed really does not understand the consequences of its actions.
I think I'll stop in responding to your previous post at this point and see whether this has been helpful. Thank you for commenting.