Federal Reserve chairman Ben Bernanke began his two-day semi-annual testimony before Congress this morning. There's no telling what the nation's elected officials will ask him, but it's a pretty safe bet that the country's highest ranking unelected official will shed little fresh light on the subject that's of most concern to investors right now. Specifically, when will the Fed stop it's QE bond buying program and begin to start unraveling its $3 trillion balance sheet.
It's a question that until recently was being tied to inflation and unemployment targets, but it now is also one that has gained new found life, following the most recent release of the minutes from the Fed's last meeting.
"I am not expecting him to say anything new about what is going to happen," says Fil Zucchi, senior writer at Minyanville, in the attached video. As much as he says the Fed is clearly paying attention to the markets following the two-day slump that followed the minutes, he does not expect any change in policy anytime soon. But that's not to say he isn't worried.
"I am somewhat concerned that our economy, for better or for worse, may be heading down the path where it relies on artificially low rates," Zuchhi says, adding that he thinks it's going to be "very very difficult for the Fed to work its way out of it balance sheet without causing some serious problems."
As he sees it, the front line in this battle is not the bond market or interest rates, it's currency."The dollar is, in fact, the whole thing," Zucchi says, adding that he "thinks Bernanke probably goes to sleep every night thinking about if he is going to wake up with the same dollar that he had today, and that's his big worry."
As much as Bernanke has commented that the problem is manageable, Zucchi is unconvinced.
"Debt bubbles ultimately end, in fiat currencies, when the trust that outside investors have evaporates." It is not only something that has happened before, it is also the kind of crisis that tends to happen rather quickly when it does.
"It's a question of confidence and nothing more than that because there is really nothing behind the dollar to back it up since we went off the gold standard," adding, at some point, "the U.S. emperor is going to be shown to have no clothes and when that happens, it's everybody for themselves."
So despite friendly communiques from the G7 and G20 renouncing foreign exchange intervention, not to mention decades of ''strong dollar" proclamations from the highest levels of government, if Bernanke loses his fight to weaken the dollar, he loses the war. It really is that simple.