Driving The Dollar Against The Wall

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 24 September 2009, 7.50 am and 7.20 pm)

At last year’s Singapore F1 Grand Prix, if you knew what was in the mind of Nelson Piquet Jr, and made the bet that he would not complete the race, you would have made money.

That’s because Nelson Piquet was ordered by two of his Renault bosses to crash his car. They picked a particular spot whereby removing his damaged car would deliberately slow down the competitors.

This gave Nelson Piquet’s teammate an advantage. For he went on to win the race that evening. Of course, the incident has been viewed negatively in many quarters.

But if seen as a strategy by team Renault to win the race, it’s not so bad. Sometimes a sacrifice has to be made to achieve a certain objective. War-time generals do this to trap their enemies.

US Fed Chief Ben Bernanke appears to be sacrificing the US dollar to achieve a certain objective too. For many months, the Fed’s policies have weakened the US dollar. This looks set to continue after Bernanke said last week that US interest rates would stay low for a long time.

This statement is significant because many thought that once the freefall of the US economy stops or slows down, the US Fed would reverse course.

The Fed’s weak dollar policy has angered many countries because the value of the greenback in their reserves is shrinking. So Bernanke’s statement last week was a disappointment to them.

Bernanke appears unconcerned by the weaker dollar because he’s probably trying to address the US government debt issue.

Right now, the US government’s debt and social obligations are as large as US$100 trillion. It will take decades of exceptionally strong US economic growth before the debt can ever be repaid.

Since this is not possible, the only way to pay off the debt, Ben Bernanke must be thinking, is by printing more US dollars. It’s okay if the dollar weakens. That is the sacrifice. So far, it has been a profitable sacrifice because the dollar has not weakened as much as the amount of dollars created.

Right now, a lot of people would really like to know what’s in the mind of Ben Bernanke. Does he really want to weaken the dollar to pay off the debt? Or is he just about to shock the markets, reverse Fed policy and raise interest rates?

If a policy reversal is announced, and with the market currently so bearish on the dollar, higher US rates would accelerate the dollar uphill faster than a Formula 1 car. Those who can read Ben Bernanke’s mind now, or can tell him what to do, will make a lot of money.

Even if the Fed is not about to reverse policy, the current weak dollar policy is extremely dangerous and can have unintended consequences. One day, no one knows when, investors could wake up, find a new global reserve currency, and dump their dollars.

That’s when we will have a global currency crisis that is as bad, or worse, than the credit crisis we saw last year. Many innocent bystanders will be hurt.

When Nelson Piquet drove his car against the wall last year, he showed that he was not only very lucky, he was also an exceptionally skilled driver, because he crashed his car in such a way that no bystanders were hurt.

Ben Bernanke is now driving the dollar towards the wall. If bystanders are not to get hurt, it’s good to question whether he will be as lucky and as skilled as Nelson Piquet.