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Federal Reserve Chairman Ben Bernake is walking a tightrope. Let's hope he doesn't fall off. While on the one hand his move to lower interest rates and buy back government bonds is the right one to stimulate the economy, there is a dark side to this strategy -- the U.S. dollar. Buying back government bonds has the effect of creating a credit on bank balance sheets. In short, it creates money out of thin air.
This is where the danger lies. The problem here is that the Fed is creating money without corresponding federal revenue. This has the effect of devaluing our dollar, even though we have the strongest economy in the world.
The Fed is walking a fine line between its stimulative policies and our declining dollar. We just need to look back to this past spring and summer when our declining dollar caused the biggest spike in commodity prices in recent history.
So like the court jester who entertains the king with his juggling, we have a Fed chairman who is juggling with our economy.
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