Um… why is the Fed pushing this view right now? This sounds a little like a pilot getting on the PA to explain how airplane crashes are good things, “because they reduce airport congestion in the long run… please place your seats in the upright position, stow your belongings, and place your head between your knees…”

Historical evidence doesn’t support the commonly held view that currency crashes are harmful to big economies, according to a Federal Reserve paper.

In fact, as long as they’re not triggered by an outbreak of inflation, crashes can actually have positive economic outcomes including stronger gross domestic product growth, lower bond yields and rising equity prices.

“Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies,” wrote Joseph Gagnon, visiting associate director of the Fed’s monetary affairs division.

“On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates,” he wrote in the paper, which had the provocative title: “Currency Crashes in Industrial Countries: Much Ado About Nothing?”

The paper was posted on the Fed’s Web site Tuesday.

Gulp. Batton down the hatches!

via Fed Paper: Currency Crashes Can Have Good Economic Effects – Real Time Economics – WSJ.

Peter Schiff has a great interview with Yahoo’s techticker.

The fiscal stimulus bill being debated in Congress not only won’t help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital.

…the difference is that the economy is in a much worse state going into this depression than it was in the 1930s… and without the discipline of gold, we have a central bank that could create massive inflation. So we could have an inflationary depression.

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

Thomas Jefferson,  (Attributed)
3rd president of US (1743 – 1826)

Stunningly easy money continues to be shoveled into the markets. The negative effects are apparent to those who are paying attention, as highlighted in this Bloomberg article:

“The dollar will go to new lows as the U.S. attacks its currency (out emphasis),” said John Taylor, chairman of New York-based FX Concepts Inc., which manages about $14.5 billion of currencies.

As we discussed earlier, the dollar appears to be in decline again. Whether it will turn into a full-fledged “run” on the dollar at this time remains to be seen. But the surge of the last few months brought on by year-end settlements appears to have run its course and is evaporating as we watch. The Fed’s actions and Bush / Obama pronouncements are pouring fuel on the fire.

The immediate outcomes? Commodity prices, which are declining significantly in “real” or even “Euro” or “Yen” terms, are likely to be flat to increasing for Dollar-based consumers. The tailwinds that bring an economy out of recession will be weak or non-existant. Stagflation is likely.

Disruptive events notwithstanding, this is going to be a terrible time to be in the dollar. Occasional 4% surges in the Dow are meaningless when countered by coincident 4% increases in EURUSD (better than $1.40 as of now)!

Investing in currencies looks like a good course of action, but understanding the details of how to do that wisely is important. (Any experienced suggestions are appreciated!)

While commentators seem to try to hedge their bets by obfuscating, the Euro continues its surge relative to the dollar. It strikes me that this is a fundamental rebound. Then again, I’m a neophyte.

Here’s a DailyFX chart that illustrates the dramatic “V” rebound.

Have we seen the end of dollar-buying to liquidate positions in the US prior to the end of the year and prior to the Obama administration’s debut?

Also note that a significant portion of the surge in oil prices is actually tied to the exchange rate. This should begin to re-introduce inflationary pressures on the economy and counter the deflation — both real and predicted — of the past several months.

This may not be a final blow to the dollar, but it should serve as a wake-up-call that we should not expect deflation to win out in the long term, especially for imported or energy-sensitive commodities.

The question is: when will inflationary pressures of dollar printing and borrowing begin to outweigh the downward pressures introduced in real estate and retail from bankruptcies and liquidations? And what impact will negative real interest rates in the U.S. have on the dollar and the economy? Is there a window of opportunity in the next weeks or months for individuals to improve their positions before the storm actually hits in full force?

The dramatic recovery of the dollar versus the Euro — and indeed generally against the foreign currency basket — might finally be fading.

Not only has the Euro surged higher in the past few days, but DailyFX analysts claim to have called the floor at $1.26 USDEUR with a projection of $1.60.

The exchange rate bounced several times at the1.25 level over the past seven weeks. Now it appears to be making a sustained, dramatic rally. How to defend against it?

This already means dramatically higher oil and gold prices. It’s likely to further impact everything from trade to ability to raise debt and defend against foreign acquisitions.

“If you look at where we’re going, we’re not on a sustainable course as a country,” DeMint said. “Frankly, GM is in a better financial situation than we are as a country. The only difference is we can print money. But as other countries around the world lose confidence in the value of a dollar – that’s going to come home very shortly.”

http://www.businessandmedia.org/articles/2008/20081211131911.aspx