As a result of this story, the dollar rose half a percent across-the-board, and gold is now about $80 below its recent peak.
Now, don’t get me wrong. I don’t want QE anything. There’s plenty of unused liquidity sloshing around the system. And a stable King Dollar is the best medicine for economic growth and price stability.
What will trigger a stronger economy withjob creation is the $100 billion budget cut now being discussed by Republicans in the House along with a freeze on the Bush tax rates. That’s pro-growth fiscal policy. Join it with pro-growth currency stability.
But back to the Fed and Treasury. A minimalist Fed stimulus is certainly better than a massive new-dollar creation that would totally sink the greenback and lead to a much higher inflation tax far more quickly than almost all commentators think.
And here’s an interesting point. Maybe Bernanke & Co. hasbeen watching inflation-sensitive market prices, including gold, commodities, the negative real yield on inflation-protected bonds, and even the run-up in oil. Perhaps the Fed is at least cognizant of the risks of a plunging dollar.
Even longer-term bond rates have been backing up. So it’s not inconceivable that the Treasury and Fed are watching market-price indicators, including the dollar. And perhaps that accounts for the Fed leak of a minimalist action rather than a dollar-destroying maximum action.
And as Hilsenrath points out, there are a lot of doubters inside the Fed. The presidents of the reserve banks in Minneapolis, Dallas, Philadelphia, and Kansas City are leading the skeptical charge. Good for them.
In any event, since Geithner came out with his statement that no country can devalue its way to prosperity, and that the dollar is low enough against the euro and yen, the greenback has at least temporarily stabilized and gold prices have dropped.
The stock market is trying to figure all this out, and it got slammed earlier this morning. But the Dow came back to close only 43 points down.
Let me say this: Stocks soaredduring the strong-dollar Ronald Reagan ’80s (at least during his first term) and in Bill Clinton’s second term. These were King Dollar periods that helped set the stage for non-inflationary wealth creation and low unemployment.
More to the point, the expected Republican tsunami come Tuesday is likely to shift fiscal policy in the direction of lower spending, taxing, and regulating. We can debate how much, but that will be the GOP/Tea Party intent. That’s bullish for the dollar, the economy, and the stock market.
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