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Ackerman: Dollar’s Rally Stirs False Hopes

By: Rick Ackerman, Rick's Picks
Wednesday, 11 June 2008


With the dollar up a relatively fragile 1.8% in the last two days, hope grows that the economy can finally get back on track. At least, that’s the story America’s mainstream news outlets seem to be selling at the moment. Just look at what the greenback’s gravity-defying skew has allowed Helicopter Ben to say without having a rotten tomato tossed at his face. Here he is Monday night, addressing a Fed-sponsored conference in Boston: "Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly." Is this guy cool, or what? A week ago he couldn’t have gotten a CETA job forecasting the weather in Igloo, South Dakota. Now, with the dollar ever-so-timidly on the rise, Helicopter Ben seems to have regained credibility in the newsrooms, and reporters appear to be taking seriously any hints that the Fed’s next move will be to tighten.

Yeah, sure. And here’s the deed to a bridge that you can give Dad for Father’s Day. With the U.S. economy weakened almost to the point of coma, pushing rates higher would be like tossing an anvil to someone who is drowning. But that hasn’t stopped the punditry from speculating about an imminent reversal of monetary policy, or exchange traders from laying odds that the Fed will tighten by October. We’re not buying it, though, since we remain convinced that all of the commodity inflation we’ve seen so far, even $139-a-barrel oil, is insignificant compared to the deflationary juggernaut that has yet to unwind. You think the housing bust has been nasty so far? Wait till you see how it unfolds with the banking system under siege.

Splat!

Those who believe that tightening lies ahead must be oblivious to the economic disaster it would cause. For starters, instead of the “soft landing” that a few highly visible fools still seem to think is possible, the economy would return to earth with the splat of a thousand-pound pumpkin dropped from an airplane. And although home prices are already falling more steeply than during the Great Depression, the decline would only accelerate, perhaps turning into a full-blown panic. Also, the banks would no longer be able to slowly move “bad” paper onto their balance sheets from one fiscal quarter to the next, since defaults would overwhelm such clever accounting tricks – tricks that even now are fooling only those who need to be fooled.

Just as easing has created inflation everywhere but in the housing sector that was supposed to have benefited, tightening will only create deflation in all of the wrong places. Anyone who actually believes the Fed can bring about a measured deflation at this point is a few cards short of a full deck.

http://news.goldseek.com/RickAckerman/1213164060.php