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Last week, Ben Bernanke suggested that the US base interest rate will stay close to zero for an "extended period". It's been there since December 2008.
The US currency has also been falling pretty steadily since the summer of 2010, after Ben Bernanke gave the first inklings he would launch QE2. Photo: AP
Traders took these words to mean that the Federal Reserve won't hike rates until the first few months of 2012 at the earliest.
Bernanke also pledged to do whatever is required to keep America's economic recovery on track – confirming that the second programme of "quantitative easing", or QE2, would be completed. These two related announcements – the "reprieve" and the "sugar rush" – sent Wall Street into renewed spasms of synthetic joy.
In the real world, US growth is slowing sharply. Annualised GDP rose just 1.8pc during the first three months of 2011, down from 3.1pc the quarter before. America remains mired in sovereign, commercial and household debt.
Yet as the Fed chairman spoke, US stocks hit their highest level since before the sub-prime crisis. The tech-heavy Nasdaq, incredibly, closed at a 10-year peak.
So the Fed will keep on "printing" virtual money – at least for now. By the end of June, it will have purchased $600bn (£363bn) of longer-term Treasuries, with the US government effectively buying its own debt from funds created ex nihilo. That's on top of the original $1,750bn (£1,048bn) QE scheme, launched in late 2008.
America's base money supply – the bedrock of the world's reserve currency – has doubled in little more than two years. Despite consternation among many US voters, and dismay – rapidly turning to anger – across the world, most of America's political elite refuse even to debate QE. Such is the state of democracy in the "land of the free and the home of the brave". And America is not alone.
Plunging dollar
Bernanke's utterances caused gold to jump another 2pc. Silver – known as "poor man's gold", another "inflation hedge" – spiked 6.5pc. But the real story was the plunging dollar. Against a basket of five major global currencies, the US currency fell sharply and is now at its weakest since July 2008. The Fed's "real broad dollar index", a 26-currency composite and adjusted for inflation, is testing levels not seen since 1979.
Yet still Tim Geithner puffed-out his chest and reaffirmed America's "strong dollar" commitment. "Our policy has been, and will always be, as long as I'm in this job, that a strong dollar is in America's interest," the US treasury secretary said.
That's total nonsense, of course – seeing as a weaker currency boosts US exports and lowers the value of America's external debt. Geithner's words are not only disingenuous, but insulting to America's creditors and trading partners. In fact, Washington's constant berating of Beijing for "currency manipulation" is looking more and more like a diversion tactic.
Big statement
That's a big statement, I know. But it's based on a dispassionate analysis of the facts. I have no personal beef with America. I've spent a sizeable chunk of my life in America and much of my family is American. I love America! I feel the need to write this as quite a few US economists, even those boasting Nobel prizes, have recently accused analysts who don't toe the "Washington line" of being "America-haters".
Such ad hominem tactics are pathetic – the last refuge of intellectual cowards who know they're losing the argument. For the "Washington line" – inflation isn't a problem, we don't need to raise rates and the Fed can print willy-nilly – is not only looking increasingly untenable, but is having a severe negative impact on much of the rest of the world.
Damaging relationships
The way the Obama administration is running America's economy – continued fiscal expansionism, QE2 and "dollar benign neglect" – is not only damaging US relationships abroad, but will ultimately lead to greater pain for domestic voters too. I say this not because I hate America but because, as a citizen of the world, I care about the fate of the largest economy on earth.
This latest dollar weakness is part of a longer-term trend. From the start of 2002 until the middle of 2008, the greenback lost 30pc on a trade-weighted basis. The start of the "sub-prime" crisis proper then sent shock waves around the world. For six months or so, Western investors piled into what they knew, liquidating complex positions and buying "Uncle Sam". The dollar surged, spiralling upward during the so-called "safe haven rally".
Then the Fed began QE, apparently to tackle "deflation". The more pressing need was to bail out Wall Street and rein in the real value of America's burgeoning government debt – which happened as the dollar then fell. The US currency has also been falling pretty steadily since the summer of 2010, after Bernanke gave the first inklings he would launch QE2.
Massive problem
America's currency weakness is based on fundamentals including its vast, and upward-spiralling, $14,000bn debt – and that's just what's "on the books". Nothing material is being done to address this massive problem. The unspoken assumption among politicians on both sides of the aisle is that America can just "monetise" its liabilities by continuing to debase the currency.
So the Fed's actions are undermining the dollar precisely because that's what the White House wants. At the same time, sophisticated investors are exploiting ultra-low US rates by borrowing cheaply in dollars and switching the proceeds to currencies where returns are higher. This "carry trade" is flooding foreign exchange markets with US currency – weakening the dollar further.
Benign neglect
Yet "dollar benign neglect" is fraught with economic risks. A weak dollar makes commodities more expensive. It was when the greenback hit it's last trough of $1.60 against the euro in mid-2008 that oil soared to $147 a barrel. Expensive crude damages the world's biggest oil user. And as the dollar falls, America's huge commodity imports cost more, making the trade deficit even worse.
America's currency depreciation trick could also backfire badly if "the rope slips" and, far from a steady decline, the world's pivotal currency goes into free fall. That would plunge America back into recession, or worse – as inflation ballooned amid soaring import costs, forcing the Fed to raise rates in the teeth of shuddering slowdown.
A plummeting US currency would also spark broader chaos as central banks sought to protect the value of their reserves. And after the inevitable downward overshoot, the dollar would snap back, causing the carry trade to "unwind" as dollar borrowers suddenly owed more. The danger then would be that major losses at financial institutions posed renewed systemic threats. Financial markets might then go into a tailspin, reigniting concerns of a fully-blown global slump.
Waning power
Bernanke's comments last week were made to the press – with the Fed now agreeing to regularly scheduled news conferences for the first time in its 98-year history. Some say this decision to submit to demands for transparency indicates that the power of the US central bank, it's global influence, is on the wane.
I'd suggest that, on the contrary, the Fed's global impact may soon reach an all-time high. And that impact won't be pretty. For far from being a "safe haven", an increasingly debased dollar could be the cause of the next global financial crisis.
Reading between the lines of Bernanke's statement, I don't think that last week's Fed missive, as most concluded, confirmed the end of QE2. In my view – and I write this with a sense of trepidation – the Fed's inaugural "meet the press" moment was in fact preparing the ground for the start of QE3.
Liam Halligan is chief economist at Prosperity Capital Management.
Bernanke also pledged to do whatever is required to keep America's economic recovery on track – confirming that the second programme of "quantitative easing", or QE2, would be completed. These two related announcements – the "reprieve" and the "sugar rush" – sent Wall Street into renewed spasms of synthetic joy.
In the real world, US growth is slowing sharply. Annualised GDP rose just 1.8pc during the first three months of 2011, down from 3.1pc the quarter before. America remains mired in sovereign, commercial and household debt.
Yet as the Fed chairman spoke, US stocks hit their highest level since before the sub-prime crisis. The tech-heavy Nasdaq, incredibly, closed at a 10-year peak.
So the Fed will keep on "printing" virtual money – at least for now. By the end of June, it will have purchased $600bn (£363bn) of longer-term Treasuries, with the US government effectively buying its own debt from funds created ex nihilo. That's on top of the original $1,750bn (£1,048bn) QE scheme, launched in late 2008.
America's base money supply – the bedrock of the world's reserve currency – has doubled in little more than two years. Despite consternation among many US voters, and dismay – rapidly turning to anger – across the world, most of America's political elite refuse even to debate QE. Such is the state of democracy in the "land of the free and the home of the brave". And America is not alone.
Plunging dollar
Bernanke's utterances caused gold to jump another 2pc. Silver – known as "poor man's gold", another "inflation hedge" – spiked 6.5pc. But the real story was the plunging dollar. Against a basket of five major global currencies, the US currency fell sharply and is now at its weakest since July 2008. The Fed's "real broad dollar index", a 26-currency composite and adjusted for inflation, is testing levels not seen since 1979.
Yet still Tim Geithner puffed-out his chest and reaffirmed America's "strong dollar" commitment. "Our policy has been, and will always be, as long as I'm in this job, that a strong dollar is in America's interest," the US treasury secretary said.
That's total nonsense, of course – seeing as a weaker currency boosts US exports and lowers the value of America's external debt. Geithner's words are not only disingenuous, but insulting to America's creditors and trading partners. In fact, Washington's constant berating of Beijing for "currency manipulation" is looking more and more like a diversion tactic.
Big statement
That's a big statement, I know. But it's based on a dispassionate analysis of the facts. I have no personal beef with America. I've spent a sizeable chunk of my life in America and much of my family is American. I love America! I feel the need to write this as quite a few US economists, even those boasting Nobel prizes, have recently accused analysts who don't toe the "Washington line" of being "America-haters".
Such ad hominem tactics are pathetic – the last refuge of intellectual cowards who know they're losing the argument. For the "Washington line" – inflation isn't a problem, we don't need to raise rates and the Fed can print willy-nilly – is not only looking increasingly untenable, but is having a severe negative impact on much of the rest of the world.
Damaging relationships
The way the Obama administration is running America's economy – continued fiscal expansionism, QE2 and "dollar benign neglect" – is not only damaging US relationships abroad, but will ultimately lead to greater pain for domestic voters too. I say this not because I hate America but because, as a citizen of the world, I care about the fate of the largest economy on earth.
This latest dollar weakness is part of a longer-term trend. From the start of 2002 until the middle of 2008, the greenback lost 30pc on a trade-weighted basis. The start of the "sub-prime" crisis proper then sent shock waves around the world. For six months or so, Western investors piled into what they knew, liquidating complex positions and buying "Uncle Sam". The dollar surged, spiralling upward during the so-called "safe haven rally".
Then the Fed began QE, apparently to tackle "deflation". The more pressing need was to bail out Wall Street and rein in the real value of America's burgeoning government debt – which happened as the dollar then fell. The US currency has also been falling pretty steadily since the summer of 2010, after Bernanke gave the first inklings he would launch QE2.
Massive problem
America's currency weakness is based on fundamentals including its vast, and upward-spiralling, $14,000bn debt – and that's just what's "on the books". Nothing material is being done to address this massive problem. The unspoken assumption among politicians on both sides of the aisle is that America can just "monetise" its liabilities by continuing to debase the currency.
So the Fed's actions are undermining the dollar precisely because that's what the White House wants. At the same time, sophisticated investors are exploiting ultra-low US rates by borrowing cheaply in dollars and switching the proceeds to currencies where returns are higher. This "carry trade" is flooding foreign exchange markets with US currency – weakening the dollar further.
Benign neglect
Yet "dollar benign neglect" is fraught with economic risks. A weak dollar makes commodities more expensive. It was when the greenback hit it's last trough of $1.60 against the euro in mid-2008 that oil soared to $147 a barrel. Expensive crude damages the world's biggest oil user. And as the dollar falls, America's huge commodity imports cost more, making the trade deficit even worse.
America's currency depreciation trick could also backfire badly if "the rope slips" and, far from a steady decline, the world's pivotal currency goes into free fall. That would plunge America back into recession, or worse – as inflation ballooned amid soaring import costs, forcing the Fed to raise rates in the teeth of shuddering slowdown.
A plummeting US currency would also spark broader chaos as central banks sought to protect the value of their reserves. And after the inevitable downward overshoot, the dollar would snap back, causing the carry trade to "unwind" as dollar borrowers suddenly owed more. The danger then would be that major losses at financial institutions posed renewed systemic threats. Financial markets might then go into a tailspin, reigniting concerns of a fully-blown global slump.
Waning power
Bernanke's comments last week were made to the press – with the Fed now agreeing to regularly scheduled news conferences for the first time in its 98-year history. Some say this decision to submit to demands for transparency indicates that the power of the US central bank, it's global influence, is on the wane.
I'd suggest that, on the contrary, the Fed's global impact may soon reach an all-time high. And that impact won't be pretty. For far from being a "safe haven", an increasingly debased dollar could be the cause of the next global financial crisis.
Reading between the lines of Bernanke's statement, I don't think that last week's Fed missive, as most concluded, confirmed the end of QE2. In my view – and I write this with a sense of trepidation – the Fed's inaugural "meet the press" moment was in fact preparing the ground for the start of QE3.
Liam Halligan is chief economist at Prosperity Capital Management.
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