HardAssetsInvestor

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi everybody, and welcome back. It's Mike Norman; I'm your host here on HardAssetsInvestor.com. We're here for the second half of my interview with Jeff Saut, chief investment strategist at Raymond James.

In the last one, we talked about this policy blunder, and I totally agree with you [about] letting Lehman fail – a primary dealer regulated by the Fed – under the office of the controller of the currency. I find it outrageous that [Ben] Bernanke [Federal Reserve chairman] was in New York recently. He gave a speech at the [Economic Club of New York]. He was asked the question, "Why didn't you give Lehman a loan"?

He said it didn't have enough collateral for a loan, yet the Fed is lending to the Korea Development Bank; it's lending to practically every central bank on an uncollateralized basis.

The question now is, do you think they realize that was a big mistake and now have things changed in the sense that policies … in the beginning it was kind of like here or there – whatever works; we'll do it here, we won't do it here. But do they have in place the right plan now?

Jeffrey Saut, chief investment strategist, Raymond James (Saut): I think they're moving that way, I'm not sure that they're there yet, but I do think they're moving that way. The idea of granting swap lines to Singapore even though Singapore doesn't need it … the thought is the money is going to trickle into Indonesia and some of the other places that do need it: to South Korea as you point out, to Brazil and to Mexico. You had a growth freeze if you will, a dollar shortage if you will, and I think the fact that the Fed is being proactive and expanding its swap lines … I think it's actually a good thing, you can see that.

Norman: Let me ask you about those swap lines though, because if the Fed didn't do that, we would have seen perhaps a super spike in the dollar. Clearly against some of these emerging currencies, some of them might have disappeared altogether. Isn't it in the interest not only of the Fed but of America, and also of our trading partners … because let's understand, most central banks around the world hold assets in dollars, they have liabilities in their local currency, but if we use policy that makes the dollar go up, isn't it a plus-plus-plus?

I know you don't like it from the export side, but look, it restores American purchasing power, it gives those countries that rely heavily on exports a competitive advantage which perhaps they need right now – we see it with the decoupling how they're getting hit. It also mitigates inflationary pressure, it raises the asset value on the books. Wouldn't it have been better for everyone if they let the dollar go to where it should have gone?

Saut: History will tell the tale there. I think the dollar had gotten ahead of itself; I think it was creating problems internationally. Yes, it mitigates some of the inflationary pressures, but I don't think we're fighting inflationary pressures right here. I think we're getting a whiff of deflation over the next nine to 18 months, so I think that actually gives the Fed the ability to expand its balance sheet even more, with more proactive…