The fall of the dollar is becoming a rout.
The U.S. Dollar Index, which tracks the currency against six major counterparts, touched 73.63, the lowest since its start in 1973.
Of course the most interesting part of any financial article is near the bottom.
Bernanke said before a Senate panel today that accelerating inflation at a time of slowing growth is "complicating" the Fed's job.
"He said the Fed is in a more difficult situation than 2001," said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. "He sent a signal that the Fed may be pushing on a string, and they will have to cut rates more aggressively."
"Pushing on a string" is a scary term for the financial industry. It is the equivalent of the Bogyman, Freddie, Jason, and all the serial killers in history rolled into one. Even the possibility of it is enough to keep bankers awake at night.
But let's look at the dollar before we look under the bed.
Most people don't understand what "inflation" is. They tend to think it caused by the value of things going up.
It's not. Price inflation is caused by the value of their currency going down.
What causes this is too many dollars getting printed. That makes too many dollars chasing the same number of goods.
To make this simple, I'm going to show you a couple charts that tell the story very clearly:
Here's a chart showing the amount of money in the monetary system. Notice the parabolic rise in dollars being printed.
Now look at a chart showing the value of commodities. Notice the parabolic rise that matches the rise in the number of dollars.
And finally, let's look at the value of the dollar. Notice how more dollars get printed, the faster it falls.
"But price inflation is contained", the government says. Some people might point towards the flawed CPI number the government puts out.
Without going over the same territory again, the CPI number is bunk. Every time you go to the grocery store you can see that prices are going up far faster than the CPI shows.
If you want to see a more accurate picture of inflation, look at the 160-year old Economist magazine Commodity-price Index.
Prices are exploding everywhere because the monetary supplies of the world are exploding. The reason for so much money being printed is because the Fed is trying to manage a credit bust by making dollars cheaper. Asian and OPEC nations are printing their own currency even faster because they have pegged their currencies to the dollar.
In so doing, their price inflation rate is even higher than it is in America.
The world is being flooded with paper dollars and is causing the price of "things" to rise. Since Americans don't actually make anything anymore and must buy products from overseas, the loss in purchasing power of the dollar means the price of goods in the stores will be higher.
Meanwhile, the Federal Reserve is more worried about the economy tanking (which it is doing anyway) than it is about inflation, so it is making dollars even cheaper by cutting interest rates well below the level of inflation.
This is a tremendous disincentive to foreigners to lend us money, thus driving down the value of the dollar even further.
Pushing on a string
Federal Reserve Chief Ben Bernanke said something else in front of the Senate the other day.
"I expect there will be some failures'' of small, regional banks invested in real estate, Bernanke told the Senate Banking Committee in his second day of congressional testimony.
Bank failures and credit crunches go hand-in-hand. A credit crunch is normally directly reflected in banks being scared to lend money because they are getting a high rate of defaults on previous loans. If banks don't lend money then the economy grounds to a halt, thus causing more defaults and the cycle starts to feed on itself.
This is in essence "pushing on a string".
It refers to the ineffectiveness of Federal Reserve monetary policy: specifically, the FED's expansion of monetary reserves. It is said that the FED can add to its own reserves by purchasing assets – usually, government debt – but commercial banks will not take advantage of these reserves by lending out money. So, the FED's policy will not jump-start the economy. The FED can make reserves available, but it cannot force banks into converting these reserves into loans. Like a string – unfrozen, anyway – the FED's pushing on one end does not produce forward movement on the other end.
This is the Federal Reserve's worst nightmare. If they can't move markets then they are useless and really have no justification for existing.
So then the question is: are defaults so bad that this scenario is possible?
Well, real estate is by far the biggest asset that banks hold. If Detroit is any sort of example of what the future holds for America, then bankers should be very scared.