The Hard Truth About Money

The plucky buck is up some 11% since the end of 2004 (through Thursday) against both the euro and the yen, though it's been steadily losing ground over the last six weeks.

But of course the dollar is not "up" in any real sense of the word, not when measured against real assets, rather than similarly flabby fiat currencies. It's not up against gold, crude or wood. It's not up relative to Indian stocks, or Russian bonds, or electricity, or tomatoes, or Wall Street bonuses. And it's most certainly not outperforming real estate from Alicante to Zanzibar , including the distressed but hardly depressed hurricane alley along the U.S. Gulf Coast.

All those asset booms suggest the dollar didn't really regain stature in 2005, so much as it benefited from the perceived failings of rivals. Japan is so starved for growth it's sticking with negative real interest rates to make sure the current recovery doesn't sputter. The euro zone has surplus workers it can't fire, disaffected immigrants no one will hire, endless budget squabbles that leave everyone feeling tired and a Frenchman in charge of the central bank. (Frenchmen are not good bankers, hence Switzerland.)

You can tell this is a race to the bottom, not the top, by noting that any time a central banker opens his mouth these days, the currency he sponsors takes a dive. The dollar hasn't been the same since the Federal Reserve all but assured investors it will stop raising interest rates this spring. The yen began taking on water when Japanese politicians made clear they still want dirt-cheap loans. Currency traders thought the Jean-Claude Trichet of the European Central Bank would finally talk tough this week given recent signs of an economic revival on the continent. But Trichet pulled one of his on-the-one-hand, on-the-other-hand routines, and by the time he got through mentioning downside risks to growth, the euro was on its knees as hopes for a spring rate hike fizzled.

Why are the guardians of our currency, and of everyone else's currency, cooing like a flock of flu-free doves these days? Because their mandate is to guard growth as well as currencies. And in conditions of growing labor competition from Chinese factory workers and Indian software engineers, the path to growth in the developed world is marked with interest-rate cuts, not hikes.

The Bank of England, one of the first to raise interest rates during the current economic cycle, is expected to cut them next month. One of these days, should economic conditions warrant, of course, the Fed may follow.

Incoming Fed Chairman Ben Bernanke may not be the Helicopter Ben of Wall Street caricature, but he is coming into his job after a brief but hugely symbolic stint as the top White House economic adviser. Anyone who's worked for President Bush, and anyone Bush would name to lead the Fed, probably shares his view that the business of America is business. And business doesn't want a 5% fed-funds rate; it wants a cheap bond issue to pay for the latest leveraged takeover.

Just the other day, the president of the Federal Reserve Bank of New York made news by talking of targeting asset prices before they pump up inflation. But Bernanke is on record as opposing such meddling, comparing it to the flawed economic policies that gave rise to the Great Depression.