Following articles on the US dollar throughout the past several months, I’ve encountered a wide range of very mixed opinions. Reading primarily the New York Times business section, some columnists make the case for why the US Dollar is going to go lower and some say a weak Dollar is good for the United States. Anyone working for the New York Times is going to have to sound convincing as they are surely very good at their jobs. After reading nonstop on the subject I’ve come to some very controversial opinions of my own.

The main problem I see is the Federal Reserve. Bernanke is so fixated on patching up short term fixes and never has any insight on how we got here in the first place. It is logical to first understand why we have a certain problem then to just patch it up to delay the problem. Over the last few months the stock market has been rocky and the bond market has been even worse. Bernanke has said he is willing to cut interest rates to devalue our currency if it will help stop a recession. He’s also said that a low dollar wouldn’t affect Americans as long as they bought domestic goods. He also claims it would rid us of our deficit as the textbook approach says a low currency will correct a deficit. There are several logical fallacies with these statements and it’s more than terrifying that the head of our central bank is coming out and making comments like these.

First of all, Bernanke should not be so fixated on preventing a recession. It is a fact that if America never had a recession, we would be a lot worse off than we are today. Recessions are part of the business cycle as well as bankrupt the weaker companies and strengthen the stronger ones. If a company makes really terrible decisions, in a capitalist society that equates to bankruptcy or at the very least a massive loss of equity during a recession. A strong company may be temporarily weakened but when the recession is over they come out stronger because they’ll have fewer competitors as much of the competition went bankrupt as well as have the opportunity to buy their competitors in distress. It is also impossible to prevent a recession as the business cycle is a byproduct of capitalism. If you really don’t like business cycles, move to a country where free markets don’t exist. As the Federal Reserve’s shareholders are made up of men tied to private banks it makes sense that they would try to benefit themselves before the American people by attempting to bail out banks that took on way too much risk. By helping those out you make things worse. You set a precedent to take excessive risk because why not if you have the notion you will get bailed out by your friends if the investment turns against you. This is why Bernanke trying to prevent a recession at the expense of our currency is illogical.

The second statement Bernanke has made about the low dollar is that Americans wouldn’t be affected much as long as they buy domestic goods. Again, it is hard to believe that he sincerely believes this. A scenario which would disprove this is that of the average retired man or woman. You have a portfolio of CDs yielding 6% a year which you are living off of, you drive a car, and you eat food. When the dollar declines 50% against major foreign currencies, that man or woman has just had his or her standard of living cut in half. The 6% yield on those CDs are now yielding 6% but this time with a currency only worth half of what it used to be worth. If the oil supply and demand equilibrium stays the same, oil prices would still go up as we buy our oil in dollars. As gasoline is petroleum based, the price of gas in the United States would therefore increase. But it wouldn’t just be oil that increases most commodities from wheat to butter to sugar would increase as well. The average food company would face higher costs and would be more than happy to pass those costs onto the American consumer which would in return raise prices. It wouldn’t matter if the company was domestic or international. Unless Bernanke thinks the average retiree is living off gold krugerrands and 50 dollar palladium maple leafs, has no use for gasoline, and is willing to not eat then he has a case, otherwise I don’t buy it.

Bernanke’s other case for a low dollar as well as several New York Times columnists believe that the weak dollar would help reduce our trade deficit. They’re argument besides being a textbook example is that it is happening right now as during the course of this semester, The United States had the lowest deficit in two years. Unfortunately, to get to a trade surplus by devaluing our dollar would surly get us into a worse deficit then we are right now. So Bernanke is right in the short term, a weak dollar would temporarily reduce our deficit but in the long run it makes things much worse. As of now the United States stays solvent by borrowing 2 billion dollars a day much of it coming from the Chinese. Unfortunately, our currency is not backed by any asset but by people accepting that our currency is worth something. As of now OPEC is diversifying away from the dollar as they called the dollar, “a worthless piece of paper”. China is also diversifying out of the dollar as well. There’s a good chance they will retire the Hong Kong dollar which is pegged to the US dollar and switch over to the renminbi. Saudi Arabia will most likely get out of their fiat currency which is pegged to the US dollar and most likely move to some asset backed currency such as petrodollars. So if the dollar got so low for us to rid America of its trade deficit, these events, especially a Chinese pull out would certainly crash the dollar overnight and most likely cause a run on the dollar. When “dollar-bashers” make this argument, the US government and the Federal Reserve both say we have gold reserves at Fort Knox and currency reserves at the treasury. Fort Knox has not been audited since the 1960’s so who knows whether that gold is still even there. Assuming that it is, it would keep US currency stable for roughly two days. Our currency reserves are surely there (and if they weren’t the government could print more money as that is common when currencies are backed by nothing) and would last 8 seconds in the currency market. That’s why the reserve argument is also something to be discredited.

The way to prevent all this chaos from occurring is to get rid of our current system. When the founding fathers wrote the constitution, it was deemed unconstitutional to have a currency not backed by gold or silver. The market as a whole is very complicated and the CPI numbers are not taken seriously as an accurate measure of inflation. Many of the great investors such as Seth Klarman and Jim Rogers who worked with George Soros say that the CPI understates inflation and that the manufacturing index is more appropriate. The problem with fiat currency is that it is very easy to overprint money which leads to high inflation and a devaluation of the currency. A gold standard ensures you won’t overprint money as you can only print what is backed or partially backed depending on which gold standard you use. Instead of having a Federal Reserve micro-managing a free market economy you can get rid of the Federal Reserve which gets rid of all political and emotional bias and you leave it up to the market to determine borrowing rates, etc. While a bunch of guys debating what to do with interest rates may be really smart the individual decisions of everyone participating in the global market has been proven to be much smarter. Every major fiat currency has eventually had to reset and many of the time it retired for good. It is not a radical statement to say the US Dollar may very well go to zero and with this currency monetary policy the dollar will most likely not be the major currency anymore.