Monday, January 14, 2008

A Free Lunch!

David Malpass is the "chief economist at Bear Sterns" who specializes in semi-incomprehensible editorials in the WSJ. Today's is a dandy. He is proposing that the way to both fight inflation and combat an economic slowdown is to simply raise the value of the dollar!

Before our free meal though, let's have some appetizers.

Did you know that all floating currencies sink?

"Not known for deep thinking, the currency markets tend to sell currencies issued by countries which make markets responsible for currency values. The euro found this out the hard way in 2000 when Wim Duisenberg, then head of the European Central Bank, invited markets to set the value of the euro based on Europe's economic fundamentals. Look out below. The free fall didn't stop until Jean-Claude Trichet took over and installed policies to preserve the euro's value regardless of the market's view of economic fundamentals."

Dude, when one currency is falling, the other currency in the equation is ipso facto rising. When the floating Euro was sinking the dollar was also floating and it was floating up not down.

Did you know that Chinese inflation is due to its weak currency?

"The relationship between currency values and inflation or deflation is equally strong in other countries. China is suffering high inflation now because the gold-measured value of the yuan is weak (even though the trade-weighted yuan is strong due to dollar and yen weakness)."

OK you say, enough with the smart remarks, where's my free lunch? Well here you go. As noted, the premise of the article is that we can lower inflation and raise growth by appreciating the dollar, and, according to Malpass, we can appreciate the dollar simply by saying that we want it to appreciate:

"By saying they want a stronger dollar, the Fed, the president or the Treasury could make it happen. Government policy makers have almost absolute control over perceptions of the future scarcity of dollars. This controls the demand for dollars almost as much as it does the supply, setting its value as much or more than rates do."

Enjoy the buffet people. Don't forget to tip your server!

1 comment:

br said...

I think the WSJ has more "control over perceptions of the future scarcity of dollars" than any government entity. Maybe the WSJ should just rub the magic genie bottle.