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Steve Forbes: The Fed Just Doesn't Get It

Wednesday, 16 July 2008 10:22 AM

The Fed must act immediately to strengthen the dollar, says Steve Forbes, publisher of Forbes magazine.

"You cannot have a strong economy with a weak dollar," Forbes observes. "That's what the Fed doesn't get."

"Instead, the Fed and Treasury are saying, 'We've got to fight malaria, and then we'll deal with the mosquitoes.'"

Forbes blames a weak dollar for 80 percent of gasoline price increases, which he says may very well drive some auto companies and airlines out of business.

"Thank you very much, Federal Reserve," Forbes says. "When the cost of gasoline doubles, there's no way they can survive. As long as the dollar is weak, the oil bubble will persist."

If a weak currency were the way to wealth, Zimbabwe would own the world today, Forbes notes. "That's why the Fed is so wrong to think there's a tradeoff between inflation and unemployment. You can have low inflation and low unemployment, but Bernanke doesn't understand that."

The amazing thing, Forbes says, is that once again, the Fed makes a muck of it, and now it's going to get more regulatory powers.

"Like accountants after Sarbanes-Oxley, you goof up on Enron, and your reward is tripling your business," Forbes says.

Rather than focus on inflation, Forbes wants the Fed to raise interest rates — and announce it is doing so as part of a policy aimed at strengthening the dollar and removing excess liquidity from the economy.

"Equity markets would respond positively, businesses would resume reinvesting and foreign investors would build plants and equipment instead of shopping for bargains as they are doing now," Forbes says.

The G8, Forbes believes, would "cooperate in a nanosecond" to make open market operations, sell bonds, and remove some of the excess liquidity to strengthen the dollar.

"I would float the interest rate," Forbes says. "Banks don't lend to each other anymore anyway."

"But if people think the dollar is still going down the toilet, that this administration doesn't care about the value of the dollar, things freeze up," Forbes says.

"This is what happened in the 1970s. We saw (then) that if you just raise interest rates and continue to print too much money, you're going to have inflation. Why are we having to go back to that kind of future?"

Forbes says there's plenty of liquidity to go around — but not nearly enough investor confidence. The problem is that investors are clutching their cash because of uncertainty about what's going to happen to the dollar, which is why Treasury rates are so low.

"We should have learned from the early 1980s when you get a stable currency, the economy starts to recover and people start to invest again," Forbes says.

As far as international investing is concerned, Forbes urges investors to concentrate on picking equities and investment sectors instead of buying "a basket of investments in a specific country."

"Sometimes countries are doing well, but their stock markets stink," Forbes says. "Don't just buy a region and think, 'Voila, we're going to get rich.' The broker will get rich, not you.'"

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The Fed must act immediately to strengthen the dollar, says Steve Forbes, publisher of Forbes magazine."You cannot have a strong economy with a weak dollar," Forbes observes."That's what the Fed doesn't get.""Instead, the Fed and Treasury are saying, 'We've got to fight...
Wednesday, 16 July 2008 10:22 AM
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