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May
27
2021

A Friend Asks "Is the Fed Trying to Destroy the US Dollar?"
Mike Mish Shedlock

Some may mock the question both ways (of course and no), but let's discuss reality including Fed comments and bond yields.

Purposeful Currency Debasement

The Powell Fed wants 2% inflation over time and has committed to let inflation run over 2% to make up for past undershoots.

Given that Fed-sponsored inflation is purposeful debasement, the answer to my friend's question is "of course". 

What About the Competition?

The Fed has competition. Every major central bank wants the same thing. 

One of the ways central banks sponsor inflation is by holding interest rates low. 

In addition to sponsoring inflation slowly, the more immediate impact of low interest rates is economic bubbles.

Why is the US Dollar So Strong?

Q: If the Fed wants to destroy the dollar, why is it so strong?
A: Look at interest rates. 

Other central banks are trying as hard or harder than the Fed. 

Note: My chart from a St. Louis Fed data download shows month-end values. The inset is as of  2021-05-21.

Greece so distorted the chart with yields that approached 30% I had to remove it from the display. 

What a hoot! 

Quote of the day in weekend FT, “Germany’s 10 yr yield was a relatively lofty minus .12% yesterday.” A new definition of ‘lofty.’

Competitive Debasement Competition 

The competitive currency debasement competition is intense. 

The Fed has help though, much more so than the EU. 

Three rounds of fiscal stimulus, one under Trump and two under Biden, has the Fed has inflation headed the right way (assuming of course you like your money to buy less).

Fed Sponsored Speculation

The real interest rate is -4.09%. Adjusted for housing prices, the real interest rate is even more negative.

Despite, year-over-year inflation a reported 4.2%, the Fed has pegged short-term rates at 0.07%. 

Adjusted for housing prices, real interest rates are even more negative.

For details, please see Fed Sponsored Speculation: Real Interest Rates Are -4.1 Percent, Lowest Since 1980

Economic Data is Weakening on Four Fronts

Nonetheless, despite the Fed doing all it can to kill the dollar (with considerable help from Biden and Treasury Secretary Janet Yellen), economic data is weakening.

In Economic Data is Weakening on Four Fronts I added Existing Home Sales to the List of Missed Expectations.

Home sales have declined for three months. Housing starts, retail sales, and jobs are also struggling. 

Trillions in stimulus and QE are not enough.

What's Next?

I keep wondering when the Fed will target the long end of the curve with more force. 

I don't think it would take much. A sustained stock market decline or weakening economic data could easily trigger more Fed intervention.

Note that the US 10-year yield is above that of Greece thanks to ECB targeting. How absurd is that?

If housing stumbles further, I believe it is a given the Fed will target the long end of the curve. 

Is Inflation Transitory?

The Fed says it is. Very few agree. I am one of them.

On May 7, 2021, I commented Add David Rosenberg to List of Those Who Believe Inflation is Transitory

This of course depends on how one measures inflation. 

The CPI is distorted as noted in Fed Sponsored Speculation: Real Interest Rates Are -4.1 Percent, Lowest Since 1980.

Year-over-year Inflation is much higher than 4% now. But if housing turns down, my measure of CPI inflation which factors in home prices will turn down too. See the above link for discussion.

As long as housing and asset bubbles keep expanding we will have inflation. 

Ten Point Synopsis 

1. The Fed has pledged to destroy the dollar at a rate if 2% a year. The Fed calls this "stability"
   
   
2. To make up for alleged undershooting of destruction, the Fed has pledged to destroy the dollar at a rate greater than 2% a year until it is satisfied it has met its goals on average.
   
   
3. However, the Fed's measure of inflation is very poor. It does not count housing prices at all and it has dramatically undercounted medical services inflation. 
   
   
4. The Fed has succeeded already (if one calls destruction of currency a success). But the Fed relies on poor measures of inflation so it does not see its own "success".
   
   
5. Things are not entirely in the Fed's control. All the major central banks want to destroy currency as well,  most of them to support exports.
    
6. Japan tried for decades to destroy the Yen, but failed. 
   
   
7. The Fed has help from Congress much more so than the ECB which has budget deficit rules.
   
   
8. The ECB does not honor its rules, however, and could conceivably break up, perhaps sending some member states into hugely inflationary scenarios. 

Seemingly Simple Question

My friend's seemingly simple question has quite a complicated discussion behind the immediate answer "of course!"

Got gold? 

Mish

 

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management.

Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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