Cracking The Dollar

Here's a surprise. I agree with the Wall Street Journal this morning, as it calls for a return to sobriety in the Fed's fiscal policy.

"So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.

Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting – taking the fed funds rate to 2.25% from 5.25% last September – has had little effect on the banking crisis it was supposed to ease."

The editorial goes on to suggest that the recent surge in oil price from $70 to $119 a barrel is linked to the plunging value of the dollar, caused by the slashing of interest rates. The same is true for other commodity prices, especially those for foodstuffs.

"This is a direct tax on both the world's poor and America's middle class. Just when the U.S. economy needs a resilient consumer given the fall in housing prices, these price increases have eviscerated consumer pocketbooks. In its attempt to help Wall Street and the financial system, Fed policy is punishing average Americans. The public is frustrated and angry with these price increases, and it has a right to be. Inflation is the thief of the thrifty middle class."

On the heels of the WSJ editorial, the head of OPEC forecasts the possibility of $200 a barrel oil in today's London Times: "The president of OPEC, the cartel of oil-producing countries, has given warning that the price of crude could hit $200 a barrel, sparking fears that rising fuel costs will force more businesses into bankruptcy.

Chakib Khelil, the Algerian Energy Minister and president of OPEC, said that the falling value of the US dollar would continue to drive up oil prices as investors sought to store their wealth in other assets."

Other assets, eh? So maybe I should just park my car and let that Texaco Tiger in my tank appreciate...

(We are all doomed anyway according to The Financial Ninja, as banks have lost the capacity to lend)