Bernanke Gets a Clue

According to The Wall Street Journal, “Federal Reserve Chairman Ben Bernanke on Tuesday put the U.S. dollar squarely on the Fed’s radar screen, saying its slide against other currencies has led to an ‘unwelcome’ rise in U.S. inflation and may be a factor in inflation expectations. Bernanke also suggested that the Fed is unlikely to lower official interest rates further, though his remarks suggested that — barring a further rise in inflation expectations — the Fed probably won’t contemplate higher rates until there is more stabilization in home prices.”

Well, thank God somebody has started to talk about fixing the precipitous decline in the dollar.

I did a post on this a couple of months ago.

According to the experts, core inflation hasn’t gone up. But guess what? Housing costs play a huge role in determining “core inflation.” Since house prices are falling faster than the Titanic’s anchor, this is an unrealistic view of inflation. Prices are falling on houses because there was a bubble, not because of larger economic reasons. Falling prices are not good news for all those people who have all their money tied up in their homes, especially those Americans who are inside-out on their mortgages.

Those Americans who are squeezed on one side by the falling value of their homes are squeezed on the other side by rising prices on just about everything else caused by the weak dollar. A strong currency is the hallmark of a strong country. A weak currency means a weak country.

Weakening currencies beget social unrest. Remember the Weimar Republic?

Bernanke has now started to focus on one of the ways to shore up the dollar. Well, it is about time.

Republicans should focus on the other way to shore up the dollar, which is to balance the budget by cutting spending. They should challenge the Democrats to help them protect the dollar by taking serious steps to deal with entitlement spending and corporate welfare.

When Paul Volcker tamed inflation, he was roundly hated by everybody who didn’t like the medicine he was prescribing. But that medicine cured a sick economy caused by stupid policies of Jimmy Carter.

Both the Fed and the Congress should take the current illness that bedevils our economy seriously, and they should prescribe some tough medicine now.

Visit www.thefeeherytheory.com.