Getting Frantic? A New 3 Act Play for Current Economic Times

Act I

Can you recall the last time, if ever, that a U.S. Secretary of the Treasury went to the Middle East to jawbone the local potentates, trying to convince them that the dollars they receive for their oil are really worth holding?

He was urging them (begging is perhaps a more honest word) not to follow Kuwait's action of last May, when, in order to stem inflation, the Kuwaitis stopped linking their currency to our dollar.  If the other oil sheiks follow their neighbor, a multitude of U.S. dollars will be dumped, their value will decline further, and absent a return to the gold standard, the only hope of a rescue would be an inflationary increase in interest rates.

Act II

Paulson's hat in hand act of June 1 was quickly followed by a similar performance yesterday: Mr. Bernanke, our Federal Reserve Chairman, broadcast to a world monetary conference a similar message of "hopeful strength" for our dollar, and for our economy. To quote some key phrases:

"Conditions remained strained, but the Fed will do whatever it takes."

"The dollar remains strong and stable because of Fed policy and U.S. strength".

The futility of these two performances makes evermore evident the continuing weakness of the dollar, and the parallel weakness of our government agencies to do anything about it.  There are just too many negative forces still arrayed against it:

• a housing slump, which has not yet bottomed;
• continuing credit problems, both here and abroad;
• fragile financial markets,  with volatility up and disposable income declining;
• pricing of oil beyond our control, adding the daily risk that any market gains may not be permanent.

More rate cuts are highly unlikely. GM (GM)'s closing of 4 plants adds further fuel to a domestic economy already in decline.  Astute investors will be taking money off the table, and putting out anchors to deflect losses with defensive stocks such as SDS.  Traders can be expected to continue Long on Oil, and Short on the U.S. Dollar.

You are not alone in wondering what the Act III will be.

Disclosure: Long SDS

Comments

[dink]

there is only on action the USA can take to prop up the dollar internationally and that is to stop the printing presses! There are more than enough dollars in circulation and other countries are well aware of the true reason the USA is printing more and more dollars....bite the bullet USA!

[pk de cville]

I, for one, will be glad when Mr Bush leaves the White House.

May the next president have the wisdom and strength to right our economic house.

[Pent up demand]

Congratulations, pk de cville. You win this week's award for the best mixed metaphor!

[Fritz Hottinger]

I agree with you, Dink - - - maybe the reason those sheiks don't want our dollars is because their hands get dirty due to the fact that the ink is not yet dry.

[icandoitdon]

"...absent a return to the gold standard, the only hope of a rescue would be an inflationary increase in interest rates."

since when does an increase in interest rates, which results in credit and economic contraction, result in inflation? it was precisely high intererest rates that paul volker used to break the back of inflation in the late 70s/early 80s.

we have a real conundrum here....low rates and excess credit is exactly what led to the problems we're dealing with today. but the fed is concerned about further breakdown of the financial system if high rates cause housing to weaken further...which it no doubt would. so they keep rates low despite the risk of much higher inflation and a steadily declining currency. it is a vicious circle that cannot last...something will have to give. my bet is the dollar keeps declining and we go into a deep economic contraction. we'll probably take down the industrialized world with us. despite the hype about the emerging market we're still the largest consuming nation in the world and other countries will be affected by our weakness.when it's over we'll emerge a much different...and poorer country i believe. we blew it.

you bet they are frantic. they should be.

[Kunst]

The root of the problem is the federal budget deficit. This requires huge amounts of borrowing, making the dollar extremely vulnerable to creditors forcing interest rates up.

A balanced budget would require less consumption by American, which would help address the trade deficit side of the problem.

[Whidbey]

The root of the problem is Congress, regardless of which party prevails. The evils of this institution are that the politicians have learned that we, the voters, are open to bribes, so they give us things to influence our voting. It comes down to the old adage that we can not have our cake (solvency) and eat it too (over consume). We have met the enemy and it is us. Believe it.

[Fritz Hottinger]

Thank you, guys (and gals?) - - - Some very astute and lucid comments here. Last 3 messages carry an important message, i.e.,
we voters must take back control of the institution that is controlling us.

There has been a message widely distributed on the email circuit about the 545 elected officials in DC, whom we put there - - - so we voters need to stop complaining and change the roster.

Hate to get into politics, but that is what got us into this mess, and is our best hope of getting us out. Hope everyone will do their part, and vote in Nov.

[galewhitaker]

The system is broken. As long as our lawmakers are allowed to take money from lobbyists for reelection big business (and others) are going to control our country. Where is my lobby? When I email my legislators I get an automatic reply thanking me for my interest. I will vote in November but I have zero confidence that anything good will happen.

[CaptBob]

Some of you want change--so I guess you'll vote for Aboma-na-ble President. He want's change too but his outline for the economy is as rare as his footprints in the snows of Everest.

Better off devoting your energies to your garden than the voting booth.

[Fritz Hottinger]

Galewhitaker - - you asked, "where is my lobby?"
Many years ago (showing my age here) Common Cause was started by John Gardner, to be a lobby for the 'common man" = those of us without a voice, other than our congressman.

This soon was taken over by special interest groups, like the environmentalists, and others seeing a way to push socialist agendas.

Near as I can tell the closest thing to a lobby for us "commoners" is the Libertarian Party - - - but since 3rd parties have a way of diluting strength, not building it (see what Ross Perot brought us)
I have to stand with John McCain, hoping he is more a patriot than a politician, and that the change he will bring will be common sense into the halls of Congress.

Capt Bob - - - love you name for Barack :-) He is truly a 1st class example of the ultimate politician (as opposed to patriot - - see above). But I can garden and still, will, vote.

[icandoitdon]

with due respect to the mc cain supporters, mc cain is a career politician and so is obama.

example: mc cain, senator from arizona, opposes farm subsidies and obama, senator from illinois, supports them. does the fact that arizona grows cactus and illinois grows corn and soybeans have anything to do with their positions? if they traded states is there any doubt that both men would change their positions? principle is the last refuge of a career politician...not the first.

for my part, i cannot support a man who supports the iraq war, which i believe was one of the costliest foreign policy blunders of modern times. my vote will reflect that sole issue.

the blundering of the iraq war has some parallels with the economic situation we find ourselves in today, i.e. the belief that we can do things on the cheap, whether starting a war with an undermanned and mismanaged military (thank you donald rumsfeld) or building monetry policy around excess financial leverage feeding low-priced credit and lots of it to both wall street and mainstreet (thank you alan greenspan and ben bernake). today we're treating the patient with the same poison that nearly killed him.

as for business matters, both mc cain and obama are dumb as stumps and i wouldn't look to either for leadership in this arena. but i'm not sure it matters. for a man with a harvard MBA bush has exhibited zero knowledge of or interest in economic affairs beyond his tax cut mantra. as for obama's socialist tendencies, the role of the president in this area is vastly overstated. it is the congress...socialistic regardless of the party in charge...and the federal reserve that make public policy. and the fed is as socialistic as they come from based on their actions over the last 9 months. and i bet every one of the fed governors is republican.

[Jim Hawthorne]

Wow! This is really cute!
The article describes the futile, Keystone-Cops antics of the two stars of the "Plunge Protection Team"; scrambling to fix the outcomes to the failed policies they in fact helped create and nurture...
And what do we see for comments? A lot of silly, juvenile pipe dreams about how one politician or another will 'fix' this mess.
While our government has indeed set policies in place (loose money, lower and lower rates) that made the housing bubble and the credit crunch possible, if history teaches us anything, it is that those who create problems are never the ones to fix them!
There is lots of blame to go round; but until we accept our share of the blame and quit expecting elected and appointed officials to be concerned with much beyond the next election or promotion, then there will be no change.
There was a housing bubble because we all wanted housing, and the bigger and more luxurious the better.
There is a credit crunch because of a blanket of greed and excess that enveloped us all; from Wall Street to you and me.
We live in a world largely of our own making. Maybe it's time to give a little more thought to what kind of a future will result from OUR actions today???