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Ground control to President Bush

Ground control to President Bush

Last week featured some of the most outrageous comments from elected officials,
central bankers, and economists that I have ever heard, and reveals that
it is not just President Bush whose thoughts have drifted to infinity and

Last weekend Alan Greenspan not only had the audacity to praise himself for
his inaction with respect to the stock market bubble, but for his actions in
dealing with the ensuing recession. However, by nurturing an even bigger bubble
in the housing market, and by encouraging reckless and excessive consumer,
corporate, and government borrowing, Greenspan has only delayed and exacerbated
the damage his misguided policies will ultimately inflict on the U.S. economy.
These actions may qualify Greenspan not only as the worst Fed Chairman in history,
but may ensure that he is its last. When Greenspan began his tenure, the U.S.
dollar was the world’s reserve currency. When he leaves, not only will the
U.S. dollar no longer function as a reserve currency, it may no longer function
as a currency!

Not to be outdone, Fed governor Ben Bernanke, who recently extolled the virtues
of the printing press and the Fed’s willingness to use it, weighed in with
some stunning comments of his own. He not only declared the falling value of
the dollar not to be a problem, but that its loss of purchasing power was not
inflationary. Has the esteemed Fed governor forgotten that the loss of purchasing
power of the dollar directly causes prices to rise? In fact, fiat money can
only retain its value so long as there is confidence that its issuing central
bank will preserve its scarcity. Mr. Bernanke’s comments only serve to
undermine that confidence, and hasten the dollar’s collapse. He further asserted
that despite the CRB Index’s 45% rise since Nov 2001 to a twenty-year high,
he was not worried that rising commodity prices might be a sign of higher U.S.
inflation. Perhaps that is because commodities consist mainly of food and energy,
which are excluded from “core” CPI and hence not officially part
of U.S. inflation. What’s next, will Bernanke discount the importance
of food and energy to the average consumer?

Bernanke also had the audacity to state that it is not fair to judge the dollar’s
performance simply relative to the Euro. Instead he prefers to judge its performance
against the currencies of nations whose central banks have artificially suppressed
the values of their own currencies. But it is important to note that the dollar
has fallen against just about every other currency against which it trades
freely. Bernanke ventured into the surreal when he stated that no matter how
much value the dollar loses, America’s suppliers will simply absorb the losses
and refrain from passing them on to American consumers in the form of higher
prices, for fear that such action might alienate American customers. Such a
statement amounts to the modern day equivalent of “let them eat cake.”

Particularly ironic in light of Bernanke’s above comment, several elected
officials actually criticized OPEC for raising oil prices, while ignoring the
fact that we are paying for their oil with dollars of diminished purchasing
power. In other words, blame should not be directed at the Saudi princes, but
towards the politicians themselves, whose irresponsible fiscal policy has undermined
the dollar’s value. On September 10, 2001, oil prices were about $23 U.S. per
barrel. The euro price of oil was about 25 1/2 euros and the Australian dollar
price of oil was about 44 Australian dollars. Today, though the U.S. dollar
price of oil has risen almost 50% to about $34 U.S., the euro price has
only risen by about 4% to 26 /12 euros, and the Australian dollar price has
actually fallen by 2% to about 43 Australian dollars! In actuality, its not
that the price of oil went up, but that the value of the dollar that went down.
Since OPEC nations export oil and import just about everything else, they needed
to raise the U.S. dollar price by 50% simply to stay even. Apparently OPEC
doesn’t want to eat cake.

With the dollar continuing its slow-motion crash, there was no shortage of
short-sighted comments regarding the potential problems the weak dollar might
cause Europe and Japan. Last week, many senior officials asked to comment about
the weak dollar simply ducked the question by repeating mantra that only the
Secretary of the Treasurer can comment on the dollar. However, on January 11th,
during a 10 minute national Sunday morning talk show interview, John Snow was
not asked one question about the dollar. (That would be like interviewing the
CEO of a major corporation with a collapsing share price and not asking him
about the weakness in the stock!) So glaring was the omission, that it occurred
to me that perhaps Snow consented to the interview only on the condition that
he not be questioned on the dollar. This would reveal a clever strategy in
which all other government officials defer dollar comments to Snow, and Snow
himself then refuses to be questioned on it. In so doing, the government avoids
discussing the single most important problem confronting America today. The
only official statements I did hear with respect to the dollar was that no
one was concerned about its decline. The truth is, since there isn’t anything
the government can do to stop the dollar from falling, it is forced to adopt
the absurd position that it is not concerned in an effort to conceal its impotence.
In reality, I’m sure the administration is not just concerned, but petrified!

On Friday, the labor department reported that only 1,000 new payroll jobs
had been created during the month of December, about 150,000 fewer than expected.
Many economists and politicians expressed concern that such anemic job growth
might undermine the “recovery.” However, since the majority of these “economists??? are
of the misguided opinion that consumption drives the economy, they should have
actually been rejoicing in the “simulative” effects such pathetic
job growth is sure to produce. That is because the immediate plunge in interest
rates which followed the release of the disappointing jobs data will help perpetuate
the housing bubble and the refinancing it collateralizes. After all, what will
have a greater effect on consumption, an extra 150,000 workers cashing pay
checks, or an extra 150 million homeowners cashing out equity? Besides, since
so few employed Americans actually produce anything, what good would an extra
150,000 service sector jobs be anyway?

Continuing on the subject of the housing bubble, last week I read several
appalling statements attributing the surging popularity of adjustable-rate
mortgages, not to overly inflated property values, rampant speculation, and
lax lending standards, but to the newfound “sophistication” of American
borrowers! It was argued that borrowers, particularly first time buyers intending
to stay in their houses for 5 years or less, were wasting money locking in
fixed rates for thirty years. Considering the transaction, relocation and remolding
costs involved, why would individuals choose to buy and sell in five years
rather than rent? The answer is that most first time home buyers actually want
a more expensive house than they can currently afford. The strategy is to buy
a smaller, “starter home,” wait for it to appreciate, and then use
the accumulated equity as a down payment for the more expensive home that the
buyer actually desires (though the fact that today about 1/3 of first time
home buyers put zero down should lessen the need for this approach). In other
words, such first time home buyers are in actuality real estate speculators.
However, when interest rates ultimately rise and housing values fall, such
strategies will backfire, and homeowners will either be stuck making much higher
mortgage payments for homes they really do not want, or lose their houses to

Finally, President Bush, oblivious to the true financial position of the United
States, and in the tradition of a modem day Nero, proposed a moon base and
a manned mission to Mars. I can only imagine how such statements must infuriate
officials at the Bank of Japan, as they contemplate the added currency intervention
necessary to finance such an extravagance. President Bush needs to be careful,
as such grandiose statements might actually cause the Japanese to come to their
senses, cut their losses, and stop artificially supporting the dollar. Even
if the U.S. were in a position to afford a manned mission to Mars, what possible
economic benefit would be derived buy such an unnecessary adventure? Perhaps
President Bush is hopeful of finding intelligent life on Mars because he believes
that the Martians might be willing to buy some U.S. government bonds? Than
again, if they would buy our bonds, just how intelligent could they really

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