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Bush's Big Boo-Boo

By Steve Forbes ~ Forbes Magazine

The dumbest, most destructive economic policy of the Bush Administration has been its weak-dollar position--letting the dollar slide in value against the euro, the yen, the pound and gold. The repeatedly disproved theory in operation here is that cheapening your currency will improve your trade balance and that an improved trade balance makes your economy stronger and wealthier.

Put aside the meaninglessness of the trade balance as a measure of economic health or sickness--the U.S., after all, has had a trade deficit with the rest of the world for 350 years out of the last 400. A weak-currency policy has disastrous economic and political consequences--most immediately, our tumultuous equity markets.

Look at what's happened since the Federal Reserve began creating excess money in 2004. The already booming housing market was, in effect, shot up with steroids as lending standards were lowered to put all the excess liquidity to work. We are still feeling the effects of the subprime mortgage crisis, as banks tighten up on lending (they don't even want to lend to each other, which tells you something), which in turn has sharply slowed the economy.

Banks themselves engaged in a binge of creating off-balance-sheet structures, most notably with so-called SIVs (structured investment vehicles). The idea was that you could generate juicy fees packaging subprime mortgages and could finance them with commercial paper and not have to set capital aside. Voilà! Returns on capital blossomed! Now many of these institutions are scrambling for infusions of capital from Asia and the Middle East, as circumstances force them to put these bizarre, loss-laden vehicles back on their balance sheets. The banks' behavior is inexcusable. But, as with bartenders who continue to ply drunken patrons with drinks, the Federal Reserve bears a heavy responsibility for creating loads of excess capital in the first place and the Bush White House for winking and nodding while the dollar was being debased.

The geopolitical fallout from the weak dollar is all around us: Terrorist Iran gets massive windfalls for its oil; ditto Venezuela under its wounded but still reigning lunatic, Hugo Chávez; Russia becomes more truculently anti-American with each uptick in the price of oil; so-called sovereign funds buy up U.S. corporate assets at fire-sale prices; China, which outsourced its monetary policy to the Fed in the mid-1990s when it tied the yuan to the greenback, now faces increasingly destabilizing inflation; and oil-lacking developing countries, many of them fledgling democracies, are being hit with potentially destabilizing economic squeezes.

The prices of oil and other commodities are surging primarily because of the weak dollar. Between mid-2003 and the beginning of 2008 oil has zoomed from $25 a barrel to almost $100. Real demand in oil didn't suddenly massively increase to justify a nearly fourfold rise in price. The best indicator of inflation is gold. In this same time period the yellow metal has zoomed from around $350 an ounce to more than $800 an ounce. More than $50 of the per-barrel price of oil today comes from inflation and the speculation that inflation induces.

President Bush should promptly reverse the government's destructive course by boldly declaring that the U.S. will now actively support the integrity of its currency ( see Current Events). Bush aides might say that the President is no economist and must therefore rely on advice from the Treasury Department and the Federal Reserve, even if it is manifestly misguided.

John Kennedy was no economist either, yet he didn't hesitate to declare that the dollar should be as good as gold. Bill Clinton was no economist, but he understood that a weak dollar and the ensuing inflation it begets destroyed Jimmy Carter's (nyse: CRI - news - people ) presidency. (During the 1978-80 portion of the Carter Presidency, a young currency economist at Citibank named Norman Madrid who got newly hired into a team of five economists advising Fortune 500 companies on global currencies, saw the yen, Swiss franc and German mark wipe out the dollar. Promptly, Carter, who also had a problem in Iran, got kicked out by Reagan.) Ronald Reagan actually did study economics, and he was willing to pay a severe but, thankfully, short-term political price to break the inflation fever gripping the country in the early 1980s. He tightened up the money supply and defended the dollar.

If President Bush is too befuddled or fearful to act now to shore up the dollar, the markets will force him to do so fairly soon. It would be better to act ahead of events than to be seen responding to them defensively and belatedly.

Poisoned Bulbs / Mr. Edison, Come Back!

The idiocies from Congress have made its popularity ratings even worse than those of the current White House occupant. The latest example: Our national legislators are banning traditional incandescent light bulbs, which were invented by Thomas Edison more than 120 years ago. By 2014 these bulbs will be illegal.

Instead, we'll be coerced into paying six to eight times the price of incandescents for supposedly more "efficient" compact fluorescent light bulbs (CFLs) that last longer and consume less electricity. Well, if CFLs are so great, why do we need a law to force us to buy 'em? Why can't politicians set aside their Nanny Bloombergesque dispositions and let the markets work?

But there's a more immediate problem: Each CFL bulb contains about 5 milligrams of mercury, a highly toxic and indestructible substance. It's like bulbs with asbestos. Billions of these bulbs will be everywhere. If one drops and breaks, you've got a problem, especially if you have small kids or pets roaming around.

Here's a harbinger of the crisis to come from an item in Investor's Business Daily: "According to an article in the Apr. 12, 2007 issue of the Ellsworth [Me.] American, [Brandy] Bridges was installing one in her daughter's bedroom when it dropped on the floor and shattered. Luckily, Brandy knew CFLs contained mercury and called the store where she bought hers for advice. She was advised to call the Poison Control hotline, which in turn directed her to the Maine Department of Environmental Protection. DEP showed up and found that mercury levels in her daughter's room were six times the state's 'safe' level. The DEP specialist gave her a 'low-ball' estimate of $2,000 to clean up the room."

Think about the challenge of disposing of all this mercury when the bulbs ultimately burn out.

Too bad Edison isn't around to invent a suitable punishment for the dim bulbs who passed this legislation.

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Good day and good investing!