Home > Uncategorized > 2011/04/28: You Can’t Fix It If You Don’t Admit It’s Broken: Bernanke and Geithner Destroying the US Dollar

2011/04/28: You Can’t Fix It If You Don’t Admit It’s Broken: Bernanke and Geithner Destroying the US Dollar

After two days of solid reassurances from Messrs. Bernanke and Geithner that the US has a ‘strong dollar policy’ the Greenback had heard enough, and continued its orderly (for now) slide toward the rabbit hole. As one financial media wag noted in response to Mr. Geithner’s ‘strong dollar’ assertion on Tuesday, (loosely paraphrased) “It’s lucky for him he’s not on a ‘pay for performance’ compensation package.”

It’s not just that they do not in fact have a ‘strong dollar policy’. It is that this is one of those disturbing episodes of cognitive dissonance we see from time to time in government finance officials and central bankers. What is most striking is that they seem to have failed to learn the lesson from history: it doesn’t help in the financial markets to consistently repeat the Big Lie. Rather than impress anyone that the situation might possibly be alright, repeating it only serves to drive the trend that much further in its current direction.

And that is precisely what we are seeing in the US dollar on the back of their mindless adherence to an obviously incoherent perspective. The US dollar has many reasons it can likely head lower. Those factors include everything from the US administration’s lack of effective geopolitical leadership to the Fed’s mindless ‘extended’ low interest rate policy driving risk asset price escalation. We’ll have more on each of those very soon. But for now, suffice to say it is the lack of acknowledgement there is a problem which allows the bears to rule the trend of the Buck; and leaves the bulls in considerable disarray.

And the key technical factor which can drive the US dollar much lower is that Geithner and Bernanke have now allowed it to slip into the position where it is an obvious ‘carry trade’ funding source. This is different than the yen or other currencies previously providing ‘free’ funding for risk trades… as it is now a key reserve currency which has turned into a selling target with a bulls-eye tattooed on its back!! 

Much as in the case of the S&P downgrade to the US government debt rating outlook, this is not just a matter of a US flagship instrument suffering. This is one of the cornerstones of the entire global trading and investment system that is being allowed to fall into disarray. While to a somewhat lesser degree, much as in the US debt rating this has to do with a foundation of the system looking shaky, and not just one of the other participants.

The lack of overall leadership, both political and financial, is amply evidenced by the accelerating upward trend of Gold. When people inquire how it can continue endlessly upward, there is a simple if troubling answer: “It’s the US dollar, stupid!” As the global uncertainty is now being reinforced by weather and crisis-related agricultural production disruption (ala unseasonably heavy US storms and Japan), the outlook is for higher prices in any event. And the degree to which the powers that be (like President Obama and likely soon Mr. Bernanke) look for culprits in those evil ‘speculators’ is also striking.

The old adage goes, “If it ain’t broke, don’t fix it.” Unfortunately, the corollary to that sensible admonition is that not admitting that something which is broken has a problem does not allow for any address of the situation. What do we suspect Messrs. Geithner and Bernanke will be able to do timely if the current US dollar weakness accelerates, as it is likely to do now that key technical supports are broken? [See our Friday, April 1st General Update (major US Dollar trend views start on page 4) and chart projection supplement for more on that critical long term technical failure.] 

Can they pull a volte face and suddenly declare a crisis where they had so recently seemed content with policy and performance? Only if they want to admit they have been very wrong about the situation…

…and we all know how much government officials relish that prospect. In the event they will most likely still try to say everything is ‘fine’, and look for someone to blame for the sudden dislocation of the currency. What else can they do after both already said “we have a strong dollar policy” over the past two days while in fact they are ignoring it? However, before they run off trying to find the culprits responsible for the US dollar ‘crisis’, possibly they should track down the offenders’ banker. While the US Treasury shares the blame for such poor stewardship of the greenback, the real culprit is the funding source for the ‘carry trade’ selling of the US dollar…

…and that would be Mr. Bernanke. One and the same gentleman who views global inflation as a problem other governments and central banks (once again loosely paraphrased) “…have the levers to address if they choose to use them.” In other words, never mind how much the Fed is creating inflation elsewhere with its continued extensive easy money policy to address US housing and employment weakness. The irony is that its policy is also eminently NOT solving those problems, and Mr. Bernanke openly admitted he has no power to remedy them at the press conference.

If the Fed’s easy money policy were creating any real investment for economic growth and job creation, that might justify continued ease and liquidity expansion. But it is not. As the Editor of the Financial Times noted today in a mostly complementary take on the Fed’s move toward greater transparency, (there are risks, and) …the gain from pressing down further on long-term rates would likely be small, and would come mainly from asset-price appreciation not new investment.”

And if that creates a bubble elsewhere, the Fed sees it as somebody else’s problem. Hopefully it’s as ‘transitory’ as Mr. Bernanke would like everyone to believe.

Unfortunately, the longer the Fed remains committed to maintaining that ‘extended’ free money and liquidity provision, the more so the ‘extended’ upward spiral of risk asset prices will continue. This ‘free’ money and lack of any sense the US dollar can strengthen markedly is a driver for the confidence to invest cheap US liquidity in risk assets. And the downward spiral of the greenback will continue until (at the very least) someone in authority admits there might be a problem… …which the market will force upon them soon enough if they continue to try and avoid proactive address of US dollar weakness.

Extended Market Implications

On balance, there is every reason to suspect the US dollar remains in a more directional bear trend technical failure than many of its supporters (including ‘strong dollar policy’ pseudo-adherents Bernanke and Geithner) would care to allow. Even though EUR/USD stalled initially into next incremental 1.4500-1.4600 area congestion resistance last week it quickly recovered to a modest new high above 1.4500. It is of no small note that a currency as challenged in its own right as the euro (essentially the US dollar’s co-weak sister) chose the Wednesday’s FOMC activity and press conference to convincingly escape 1.4500-1.4600 hefty historic congestion resistance. It looks like the 1.5000 area is next, with the November 2009 major 1.5142 high is also critical long term Tolerance of the multi-year topping attempt against the US dollar. Please refer to the analysis referenced above for extended perspective on that. Suffice to say for now that any violation of that 1.5142 high would indicate that the EUR/USD July 2008 all-time high at 1.6040 would also become very vulnerable to a significant violation.    

Yet, as good as fellow weak sister euro may be doing against a significantly damaged US dollar, this all raises a question: Is it more effective to pick favorites in a battle of the two weak sisters, or be negative toward the US dollar against stronger currencies like the Australian dollar or the Canadian dollar? The former took the recent bounce in the US dollar and only reacted from the upper-1.0500 area to the mid-1.0400 area prior to pushing to a significant new high that has quickly overrun next incremental 1.0700 historic congestion area resistance. As we suspected, that opened the door for a push to the 1.10 area resistance. For various technical and psychological reasons, much above that level the AUD/USD might just push right to major 1.1600 area historic congestion and next incremental oscillator threshold. That would also likely see quite a bit more general weakness hit the US Dollar Index (as long as the heavily weighted euro also remains firm.)

Psychology is still very important in the June Gold future for the US dollar as well. It had not even Closed below initial strong support in the 1,450-40 area two weeks ago, and pushed right up through the 1,480-90 area last week. Now the burden of proof is on the bears to stop the market at next oscillator resistance in the 1,520-30 area, with 1,550-60 next stop above that. That is also the sort of strength in the “alternative currency” (to questionable fiat paper) that would potentially indicate much more near-term weakness in the US dollar.    

Thanks for your interest.

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    April 28, 2011 at 1:34 PM

    I heard that the administration (read “Chicago school”) is pretty much fed up with the uncontrollable “beard guy”. Is it any likely that they are going to do away with him?

    Also, what Axel Weber is doing in Chicago? Just lecturing?

  2. April 28, 2011 at 2:48 PM

    Herr Weber is going to be a guest lecturer at U of C Booth School for 1 year starting in June. Glad to have him. In addition to the planned MBA courses in central banking maybe we can get him to run a workshop in central banking and gov’t finance principles; and we can get some our folks in there.
    As far as Mr. Bernanke’s tenure, he’s secure. For all of the problems overly easy policy is creating, the pols like the stock market performance and will muddle through the weak jobs & housing…
    …unless there is another crisis (keep an eye out for my upcoming post on that.)
    But they also like that he speaks to them in plain English; and you can be sure they don’t miss (even a little bit) Prisoner Greenspan torturing his Inquisitors.

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