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A Strong Dollar?

Incredible!  From the man who can't even figure out the step by step directions of Turbo Tax, comes another tired "reiteration" of the importance of a strong dollar.  In a Financial Times article today, good ole sincerely trustworthy Mr. Sir Treasury Secretary Timothy Geithner did proclaim, "I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar."  I've two words in response which I won't post.  (Hint, they begin with b and s.)

Now I know that the Federal Reserve is an impartial independent body, however the following graph illustrating the inflationary expansion of the monetary base doesn't convince me that a strong dollar in likely in the near future.


Then also, there is the National Debt, hardly ever mentioned in polite company, a wonderfully nice place to invest current dollars for assuredly less valuable dollars at maturity...
http://www.treasurydirect.gov/govt/charts/charts_debt.htm
Source: http://www.treasurydirect.gov/govt/charts/charts_debt.htm

The public debt is nearly 84% of recent GDP numbers, and subtracting all governmental contributions to GDP means the debt is a little less than 4% greater than the private sector's contribution to GDP. 


Government is growing larger, i.e., spending more...


While receipts (tax revenues) are contracting.


The "Bush" tax cuts will be allowed to expire in 2010, the WSJ mentions this today.  (As an aside, I wondering about an end of year equities sell off, to take advantage of the lower capital gains tax rate of 2009.)  This, I fear, will not aid in our economic recovery, which leads me to conclude that tax receipts will continue to contract.  Federal expenditures are not likely to contract any time soon either, so, another budget year with a deficit, more debt that must be financed.  This at a time when a number of countries and world organizations are calling for "alternative" reserve currencies.

Other than the illusion of security, there is little reason to hold dollars.  Low rates leads to borrowing dollars to invest elsewhere.  Hence the dollar funded carry trade.


Higher interest rates attract foreign investment, and lead to a strong domestic currency.  Australia's official bank rate is 3.25%, holding Australian dollars is seemingly easy money.



The dip, of course, represents the "flight to quality," or the unwinding of carry trades, as the impact of the "liquidity crisis" swept the world last year.

I cannot imagine that the world would take Geithner's statement seriously.  There are too many plainly visible, easily checked facts which refute his assertion.  If the official policy was leaning towards a strong dollar, I would expect higher interest rates to incentivize savings and investment, executive fiscal & legislative policy which encouraged economic expansion, and a serious effort to reduce the national debt.