Lie of the Month: Geithner Says US will Not Engage in Devaluing Dollar

Given all the problems with foreclosures, it might seem hard to pick a winner for the lie of the month contest. However, fraud and lies are not the same thing, but even if they were, Geithner is up to the task.

Please consider Geithner denies US bid to weaken dollar

Speaking at a meeting in California on Monday, Tim Geithner, Treasury secretary, denied that the US was trying to devalue the dollar to boost its economy.

“It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity and competitiveness,” he said. “It is not a viable, feasible strategy and we will not engage in it.”

"US Needs a Weaker Dollar" Theory Running Rampant

Everyone but Geithner seems to be latching on to the "US Needs a Weaker Dollar" theory.

Check out this Bloomberg story: Geithner Weak Dollar Seen as U.S. Recovery Route Versus BRICS

For U.S. Treasury Secretary Timothy F. Geithner, a weaker dollar may now be in the national interest.

The dollar has dropped more than 7 percent since Aug. 27, when Chairman Ben S. Bernanke signaled the Federal Reserve is prepared to ease monetary policy. Where once such a decline may have been met with resistance from the U.S., Geithner may now be tolerating it as a way of bolstering the recovery.

Companies from Costco Wholesale Corp. to Deere & Co. have credited the weaker dollar for giving their earnings a boost, and the currency’s slide has helped propel the Dow Jones Industrial Average above 11,000 for the first time since May.

“In an era where deflation pressures appear to be the greatest risk, growth is below trend and the U.S. wants to boost exports, why would they not want” a weaker dollar, Jim O’Neill, chairman of Goldman Sachs Asset Management in London, said in an interview. “The answer is when it becomes a problem for financial markets. Until then it’s a straightforward strategy.”

“The dollar is going to go down,” Martin Feldstein, a Harvard University professor who was chief economic adviser to President Ronald Reagan, said Oct. 7 in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “It will cause Americans to shift from imported goods into domestic services. All of that will strengthen the economy.”

A weaker dollar is “a positive for equities as long as it’s not viewed as a collapse of the dollar,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion.

Matt McCormick, portfolio manager at Cincinnati-based Bahl & Gaynor Inc., which manages $2.9 billion, said the dollar’s weakness is benefiting companies he owns with “significant” overseas revenue, including McDonald’s Corp., Procter & Gamble Co., Intel Corp. and Qualcomm Inc.

“A low dollar will be with us for longer than most people expect,” he said.

“Geithner’s comments recently have been not exactly dollar-supportive,” said Barry Knapp, chief U.S. equity strategist at Barclays Plc in New York. “Typically what happens is that the Treasury either says we support a strong dollar or we think a free market should decide where the dollar goes, and that means we don’t mind if it goes down.”

Misguided Theory

The problem with this misguided "we need a weaker dollar" theory is that it only looks at one side of the equation. Small businesses have been crucified by rising input prices and falling output prices.

Indeed NFIB Small Business Trends for October Continue to Show No Recovery, Inflation Not a Threat; Fed Governor Hoenig Blasts Bernanke's QE Strategy

Every month I report on NFIB small business trends and every month it looks like a broken record. October is no different. Please consider NFIB Small Business Trends for October.

Inflation Not A Threat

Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell, and apparently a majority at the Federal Reserve are now worried. New “inflation targets” are being floated out there, like two percent (characterized as price stability?). This will be the justification for more “quantitative easing”. Buying more Treasury securities may push rates even lower, but to what end? The impact on home sales will surely be minimal. With mortgage rates at record low levels already, even lower rates are unlikely to invite new entrants to the market.

Of course, there may be other “agendas” such as a weakening of the dollar and support for asset prices. This is very dangerous as hundreds of billions of dollars are being “allocated” based on false prices (interest rates). The charade can’t be maintained forever and weakening the dollar only invites others to join the party.

And lost in all of this focus on credit is the loss of hundreds of billions in interest rate income for savers. Certainly their spending has been curtailed as a result. Every dollar a borrower saves from some sort of refinance deal is a dollar of interest income lost to savers. Even lenders will lose income as loans with interval rate re-sets will be set based on historically very low Treasury rates (lowering net interest margins). No wonder confidence is low and uncertainty is high, it is hard to make sense of this.

The previous three paragraphs hold the key to understanding just how wrong the Fed's weak dollar policy is. Multinationals and exporters may like it, but the net effect on jobs is negative.

Geithner says “It is not a viable, feasible strategy and we will not engage in it.” Half of that sentence is true, and that is about the best you can expect from Geithner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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