The Fed’s “Dirty Little Secret”

The Fed’s “Dirty Little Secret”


The dollar hit its lowest level since July 2008 Thursday, putting more pressure on savers, people living on a fixed-income and all consumers facing soaring commodity prices, most notably in energy.

Somewhere, Ben Bernanke is probably smiling.

Yes, Bernanke — and Treasury Secretary Tim Geithner — talked tough about the dollar this week but "currency depreciation is always a central bankers dirty little secret," says Vincent Reinhart, a former director of the Fed's Division of Monetary Affairs. "They don't mind some depreciation at time…The trick is to generate some depreciation but not a lot."

It depends on your definition of "a lot"…

Since Bernanke took office on Feb 1, 2006, the dollar's purchasing power has fallen 11%, and its down 21% in the past decade and 82% since the U.S. got off the gold standard in 1971, according to Miller Tabak.

Apparently, that doesn't count as "a lot" or "too much" depreciation for Bernanke's tastes.

"A design principle of Federal Reserve policy is to get inflation up — to create more dollars so inflation doesn't fall anymore; that's associated with currency depreciation," Reinhart explains. "Nothing the Fed chairman or Secretary of Treasury says is going to change that. [But] they've got to say 'a strong dollar is in the national interest' because they don't want to be seen as promoting a weak dollar."

Comment: My first job out of college (actually was 2 years after graduation) was as a new hire as a sales trainee with IBM in 1973. My starting salary was $ 9,600. That was enough to buy a brand new Plymouth for $ 4,200 and rent a nice apartment in Tampa Florida. In 1974 Kathee and I got married (December 28th). We purchased a new home (3 bedroom, LR, dining room, den, 2 car garage, 2 bath) for $ 42,000. (The two years after college before IBM: 1 year with Campus Crusade for Christ, 1 month at chemical plant, 2 months as a Summer ministry intern, and 6 months teaching adult education at Chattanooga Public Schools.) (see earlier post for our first house)

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