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.

I've found it profitable in recent years to imagine two separate global economies. The first is a labor pool dependent on globally low rates to cope with a massive influx of new workers. Those low rates have left the world awash with cash, keeping market yields low.

The second economy is that of hard assets, be they factories, gold, crude or real estate. As the supply of labor and money swells, the relative value of capital stock and commodity inputs grows. And it's bound to keep growing, as long as we have a labor surplus fed by cheap Asian labor.

This is great news for the greater welfare in the long run, and perhaps in the short run as well, as the most populous continent transitions from subsistence agriculture to high-tech manufacturing. In this context, high commodity prices and low interest rates seem like a small price to pay. And policy makers on both sides of the Pacific are likely to keep paying it. No one wants to rock the boat, certainly not before the 2008 Beijing Olympic Games and that year's U.S. presidential election.

The Fed is serious about inflation, of course, but it defines inflation as consumer prices, not asset values. And consumer prices are not racing higher, thanks to cheap labor and technological improvements counted by statisticians as downward adjustments in price.

No one wants to rock the boat when everyone's making money. Gold is up almost 50% since I touted it two years ago, and 150% in the four-plus years since colleague Jonathan Hoenig first got the bug. The Newmont Mining (NEM) shares I bought on a dip in October 2004 have returned 28% since purchase. My Energy Select Sector SPDR (XLE), an exchange-traded fund, is up 15% since purchase in July.

It's easy to hook gains like these when you're fishing in a pond considerately overstocked by central bankers. These waters are teeming with dollars and yen and euros. All an angler needs is a shiny metal lure.

Those wishing to cast a wider net would want to look at the shares of home builders and investment bankers, as bets on strong real-estate prices and fat merger advisory fees. In an age of assets it pays to own an asset manager, as a look at the recent performances of Legg Mason (LM) and Credit Suisse Group (CSR) shows.

And speaking of Credit Suisse, I'm still a big fan of foreign stocks, just like every other mutual-fund investor. When fishing, I prefer ponds that don't require $800 billion a year of imported fish.