I found Nicolas Sarkozy's speech last week before a joint session of Congress to be quite interesting and revealing. "Sarkozy l'Américain" put on a very moving address, to be sure, proclaiming his admiration and love for the U.S.
"France will never forget the sacrifice of your children," he said, in reference to the young Americans who died defending freedom on the beaches of Normandy and Provence over 60 years ago. He also touched on the currency issues, albeit briefly. "The dollar cannot remain solely the problem of others," he said, adding "If we're not careful, monetary disarray could morph into economic war. We would all be its victims."
Mr. Sarkozy's words are important because they may provide clues to the path the Europeans might take with their monetary policy. American pundits on popular business shows have been pounding the table demanding European rate cuts, arguing such cuts are needed to stop the U.S dollar's decline -- a course of action that judging from the preponderance of Mr. Sarkozy's speech might very well be in the cards.
The fact that he too is a politician charged with keeping his citizenry happy, and fully employed, must surely weigh on which side of the issue not only he might be on, but also the other major exporting powers in Europe. Choosing between getting repaid in cheaper dollars by one's friend -- taking one for the team, as it were -- versus shown the door by one's electorate, may not prove to be such a difficult decision after all.
Of course a worldwide effort to reduce interest rates means that exchange rates would look stable to the casual observer. You can always fool some of the people all of the time. Never mind that this whole charade would be akin to an out of shape boxer demanding that his opponent enter the ring with a self-inflicted arm fracture. Monetary policy is not as transparent as a boxing match, and never will be, despite what we are told.
Such a move by the Europeans would arguably be welcomed by U.S officials as well, who up to now have had to ward off increased scrutiny of the dollar's decline. Comments such as not allowing price increases to be passed through to the consumer, as made by Federal Reserve chairman Ben Bernanke recently, come to mind. He doesn't tell us how exactly that might be accomplished, although I suppose crappy Chinese imports can be made crappier still and smaller portions can effectively prevent food price increases, among other things.
Case in point is a little breakfast treat I pick up for my daughter on the way to daycare every morning. This past week I noticed that the entire package now weighs less, which of course means there is a smaller portion in the bag. In addition, the wrapping also looks to be of lower quality, with the colors not as bright and full as before. I suppose this kind of thing can continue until said portions become so small that they get caught between our teeth instead of quelling our hunger. Perhaps at that point something gives, but I'm not holding my breath, either way.
Despite what comes to pass in the foreign exchange markets the real gauge of what is actually happening will be reflected by the price of gold. Gold has and will continue to perform well in the current environment. From the Federal Reserve's own inflation adjustment calculator, we can easily ascertain that using the government's version of inflation today's price of gold should be about $2129.62, given an $850 price from 1980. I say the 'government's version' of inflation because anyone that has shopped for life's necessities in the last few years certainly knows better than to believe those numbers.
If we were to assume an inflation rate of 10% since 2002 -- the point in time when the Fed's reflation efforts kicked into high gear and oil prices took off -- we get a gold price today of $3234.58. It should be clear the gold price, which this morning is at $792 US, has much, much further to run.
