U.S. Monetary Policy Does Not Make a Strong Dollar

U.S. Secretary of Treasury Timothy Geithner recently stated that: "Given the dollar’s role in the international financial system and the significant impact of the U.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play... The policies of the United States are designed to lay the conditions for a strong dollar and more stability in the international monetary system."

Say what, Mr. Secretary?

There is a serious disconnect in Mr. Geithner's reasoning in this statement. Although it is true that the U.S. Dollar has been comparatively strong in recent days, we hazard to say that this is probably a temporary state of affairs. As ShadowStats.com shows, the Dollar has experienced a relative peak, but is is, as of July 6th, in a steep decline. Additionally, deflationary trends to the tune of about 2% has apparently developed, rendering every dollar in circulation slightly more powerful as time goes on.

However, we posit the exchange strength of the Dollar is liminal; the currency markets are probably changing their minds about the relative value of the Dollar. More telling, though, is the continuing growth of the M1 Money Supply - physical cash and currency in chequeing accounts. That section of the Money Supply is increasing at a whopping 18% annualised... and shows no sign of slowing.

It is that growth which will, eventually, kill the U.S. Dollar, and destroy the wealth of any holders of Dollar-denominated financial instruments (be they savings bonds or Treasury Bills). The Federal Reserve is desperate to prevent any deflation whatsoever, as deflation makes debts all the more painful to the indebited - think the U.S. Government. So, the Fed is pumping up M1 as fast as the printers can press new currency, in the attempt to stoke inflation and thus lessen the pain for the indebited.

We have faith in the Federal Reserve. They may be bumbling and rather silly, but we believe they'll get this stoking-inflation thing down pat. The question, in our minds, is not if, but when. When will the inflation rate rise to once again destroy purchasing power at a rate the Fed finds agreeable?

When that finally happens, and happen we think it shall, Mr. Geithner's "strong dollar" talk will at last be seen as the hot air it really is. We suspect that many investors in U.S. Government debt will see the handwriting on the wall at some point, but there will be many, many investors who will be horribly damaged by the looming inflation. We also suspect those investors will be none too happy with the United States, nor with Mr. Geithner. Hopefully he has his ranch in Argentina already bought and paid for...