Model Portfolio timbo56:SSOF1

A box without hinges, key or lid,
Yet golden treasure inside is hid.

The Hobbit, J.R.R. Tolkien

The above riddle is one of a wonderful set of riddles that Bilbo Baggins and Gollum trade back and forth in the fifth chapter of The Hobbit.

But now our entire society faces another sort of riddle.

What interest rate is low enough to foster an incipient recovery?
Yet high enough to bolster the dollar and prevent inflation?

Answer: There is none.

Not every puzzle has a solution.

Ben Bernanke's talk has managed to push up the dollar, a little, for now. But export growth and import substitution are some of the main strengths of our otherwise beleaguered economy right now. If the dollar goes up by much, these strengths will go away, too. Also, the U.S. has negative real interest rates right now. So are the U.S. bills, notes and bonds really a good investment? It's hard to see it. Also, if the Fed is going to raise interest rates, what is that going to do to housing? How is the housing market ever going to recover, if interest rates start to go up?

I'm not going to try to predict currency rates in the short term. This month and next month, anything can happen. But there is a long term trend for the dollar, and it's not up. Nothing the Fed can do or say can stop that, because it is based on the fundamental fact that the U.S. has a huge trade deficit that must be corrected. It might take 40 years to do it, but eventually this country will have balanced trade. And only a weaker dollar is going to get us there.