Authorities are Losing Patience With Collapsing Dollar.

Jean-Claude Juncker, the EU’s ‘Mr Euro’, has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds.

“I don’t have the impression that financial markets and other actors have correctly and entirely understood the message of the G7 meeting,” he said. “The moment will come where the exchange rate level will start to cause serious harm to the European economy,” said Mr Juncker.

My Comment: Is this a joke or is “Mr. Euro” that incompetent? Since when can G7 statements dictate the level of a currency. If he wants to chastise the US for bad economic policies of the US that led to this situation that is one thing, but to seriously suggest currency markets are going to follow the will of the G7 is complete silliness.

David Woo, currency chief at Barclays Capital, said the Europeans and Americans are talking past each other. Whatever the G7 wording, Washington is happy to watch the dollar slide. “They are not going to worry unless there is a knock-on effect on US equity or bond prices. So far that hasn’t happened. There are no signs that the dollar decline has turned disorderly,” he said.

My Comment: David Woo has this correct. The value of the dollar is clearly down the list of Bernanke’s concerns. If it was higher, the Fed would not be embarking on a plethora of lending facilities and bailouts, some of which are illegal.

Silvio Berlusconi, Italy’s newly elected premier, has called for a change in the ECB’s mandate, proposing a dual mission akin to the US Federal Reserve’s mandate to promote growth as well as fighting inflation. He has the support of France’s Nicolas Sarkozy.

My Comment: What is in that drinking cup they are passing around in Europe? Berlusconi wants the ECB to have a dual mandate like the Fed, when the Fed has failed on both halves of its mandate. Why would anyone in their right mind want to emulate what Bernanke is doing and Greenspan did?

Paulson Supports Strong Dollar

Like a clock stuck on midnight for ages, Paulson is chirping the same old cuckoo. Please consider Dollar Drop Slows With G-7 Blessing; Shows No Endgame.

A stronger euro benefits Europe by helping to temper inflation. Maintaining price stability is “of paramount importance,” European Central Bank President Jean-Claude Trichet said in Frankfurt on April 15. Inflation in the 15-nation euro region accelerated to 3.6 percent last month, the fastest in almost 16 years.

ECB policy makers will have to “tolerate a stronger euro” or raise interest rates if they want to bring inflation down, said Thomas Mayer, the London-based chief European economist at Deutsche Bank.

“Is there a level of a euro where the economy falls apart?” he said. “No, it’s a gradual process.”

While Treasury Secretary Henry Paulson has said he is a “very strong” supporter of a “strong dollar,” one of his predecessors, Paul O’Neill, described that policy as “vacuous” in a Bloomberg Television interview last week.

Are any reporters reading this blog?

If so, would one of you please ask Paulson when he is going to stop chirping Cuckoo and talk about fundamental reasons the dollar is falling: like deficit spending, the Fed slashing interest rates, the bubble blowing policies at the Fed, and a plethora of lending facilities some of which are illegal.

Instead of just chirping cuckoo, Paluson is now chirping cuckoo “very strong”. What’s next? A public appearance with Mr. Euro so they can both chirp at the same time?

Open Dissent At The Fed

Meanwhile there is open dissent at the Fed: Fed hawks Lacker, Fisher warn on inflation.

Two top Federal Reserve officials warned on Thursday against the risks of inflation, in remarks that underscored the existence of a hard wing of policy-makers who oppose further interest rate cuts.

Both Richmond Federal Reserve President Jeffrey Lacker and Richard Fisher, president of the Dallas Fed, in separate speeches cited the dangers of delaying moves to rein in inflation.

“Inflation is a problem now. It is too high and personally I would be uncomfortable in just waiting for economic slack to bring it down,” Lacker told reporters on the sidelines of a symposium here.

Volcker Scorns Fed Bailouts

Not only is there open dissent at the current Fed, ex-Fed Chairman Paul Volcker Scorns Fed Bailouts.

The Bernanke Fed may have already seized too much power and has abandoned historical principles, says Paul Volcker, who was Fed chairman from 1979 to ’87. “The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers,” Volcker, 80, told the Economic Club of New York on April 8. “A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time- honored central bank mantra in times of crisis: lend freely at high rates against good collateral. It tests it to the point of no return.”

Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh, agrees that Bernanke is swatting a fly with a sledgehammer. “In monetary policy, he has not been good,” Meltzer, 80, says. “It is a silly policy designed to head off a recession that may come but hasn’t come yet.”

Inflation Threat

Meltzer says the Fed, by ignoring the inflationary potential in its latest rate cuts, is creating the possibility of negative real interest rates. He also says the Fed should never take credit risks, especially to save floundering banks. “We can’t have a system that continues to work well if the bankers make the profits and the public, the taxpayers, take the losses,” he says. “That is not a viable system.”

Meltzer says Paulson’s plan for expanded Fed oversight of the financial industry is both overreaching and impractical. “It’s hard to see how the Fed is going to do it,” he says. “The Fed’s record of anticipating and heading off crises is poor. Now they are going to go out and examine investment bank portfolios? Most of the people who are buying and selling this stuff don’t fully understand it. How is some Fed auditor going to figure it out?”

Uncertainty Principle Corollary Number Four

With that let’s recap Corollary Number Four to the Fed Uncertainty Principle.

The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Mike “Mish” Shedlock
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