Fantasy-Based Economics

by: Barry Ritholtz

Here's the latest work of David Malpass, chief economist at Bear Stearns. You can find it in the romance & fantasy section of your local bookstore WSJ:

"When President George W. Bush addresses the Economic Club of New York on Friday, his comments on the dollar crisis will be the crucial issue for markets and the economy. The best thing he could do would be to state clearly that he wants a stronger dollar. That would draw liquidity back to the U.S., lower inflation risks, and head off the growing calls for government bailouts and support programs.

Absent administration support for the dollar, recent Fed rate cuts have simply sped up the flood of capital away from the U.S. without providing enough domestic stimulus. The rest of the world is already full of cheap dollars, pushing gold and oil to new highs, European tourists onto Madison Avenue, and petro-dollar sovereign wealth funds into building islands to use up their excess.

A clear presidential preference for a stronger dollar could cause an immediate leap in financial markets. U.S. stocks and corporate bonds are attractively priced -- except for the dollar risk. No matter how high a bond yield or how strong the track record of a U.S. private-equity manager, the threat of continued dollar weakness holds global liquidity at bay. The prospect of a stronger dollar would reverse that." (emphasis added)

Um, no.

The folks who believe this sort of drivel would do well to recall Ralph Waldo Emerson: "Your actions speak so loudly that I can't hear what you're saying."

The President's words about the dollar, in the waning lame duck months of his presidency, are irrelevant. His actions over the past 7+ years, in concert with those of the Federal Reserve, are what matters. Can anyone honestly believe that mere speechifying is going to overcome the impact of enormous deficits, excessive government spending, reckless growth in M3, historically ultra-low rates, and an ongoing intervention in credit, currency, capital and fixed income markets?

I've noticed this wingnut fantasy sequence repeatedly over the past 8 years: ignore reality, jawbone the way you hope things should be, ignore the results of your words and actions, declare victory. Mission accomplished.

It is an absurdly infantile way to manage any sort of enterprise. You will note that none of this crowd truly runs anything -- much less manages assets. The returns would overwhelmingly disprove the theory; this group is long on blahblahblah and short on accountability.

Here is a simple truism: Capital goes to where it's treated best. All the bully pulpit speeches and wishful thinking cannot change that reality. The Fed's mad dash towards zero interest rate policy [ZIRP] has debased the dollar in pursuit of an even more absurd policy aim: ending the ups and downs of the business cycle.

Who is more culpable: The emperor, or those who comment on his finely woven garb?

Bush and the Dollar
WSJ, March 11, 2008; Page A21

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