Yen and Bear It

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

-- H.L Mencken

Take our government officials, please. Senators Schumer and Graham have been on a nonstop campaign to annoy the Chinese into letting the yuan rise. Treasury Secretary Paulson has been ineffective both in protesting his virtue and in maintaining his street cred on the matter of the dollar.

The dam broke last week; the world collectively said it was as mad as hell about the U.S. abusing its privilege of printing the world's primary reserve currency and wasn't going to take it anymore. The Federal Reserve's policy of attempting -- unsuccessfully -- to deal with the credit mess created by its last spate of easy money first and worrying about the dollar later is failing.

This might be amusing if it were not so tragic. The dollar's decline constitutes an impoverishment of the American consumer as the greenback becomes a weaker claim on the world's productive capacity. Inflation -- and we have to talk about actual inflation, not the government gimcrackery so off-base it would make an Enron accountant blush -- represents a similar impoverishment.

Both a weaker dollar and higher inflation are de facto taxes on the American citizenry. Lower asset values in the form of lower housing prices and now stock prices represent balance-sheet impairment. And if you believe statutory tax rates are going to fall after the 2008 elections, please see me immediately after class.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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