Bad Medicine

There’s a great article on the Fed, the history of easy money, and the likely consequences in the Saturday WSJ.

Highlights:

Barely nudging Mr. Madoff out of the top of the news was the Federal Reserve’s announcement last Tuesday that it intends to debase its own paper money. The year just ending has been a time of confusion as much as it has been of loss. But here, at least, was the bright beam of clarity. Specifically, the Fed pledged to print dollars in unlimited volume and to trim its funds rate, if necessary, all the way to zero. Nor would it rest on its laurels even at an interest rate low enough to drive the creditor class back to work. It would, on the contrary, “continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

and

One market, only, registered a protest. The Fed’s declaration of inflationary intent knocked the dollar for a loop against gold and foreign currencies. In many different languages and from many time zones came the question, “Tell me, again, now that the dollar yields so little, why do we own it?”

Great question. Maybe we can help Ben out with a few potential answers for our friends who are (barely) propping up the US economy:

  • We’re #1!
  • “If you don’t, the terrorists win”?
  • USA! USA! USA!
  • It’s good for you. Like spinach.
  • You might be losing money, but you’ll make it up in volume.

In our American reader’s case… “Because you have to”? No, we don’t have to. We may be paid in dollars, but a variety of non-dollar or contra-dollar alternatives exist. We’ll look into them over the coming weeks.

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December 20, 2008 · Filed under Politics, dollar, inflation, meddling

Fire Sale Ahead

Janszen at iTulip.com is always on target. His latest post, focusing on the latest rate cut insanity and the Fed’s likely next steps is no exception and a a powerful must-read.

Early in the article, he focuses on the potential short-term benefit to consumers being huge discounts. But he also lays out some prophetic advice:

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation. 

But elsewhere he suggests that consumers would better save their limited funds to prepare for the coming disaster than to spend them. But isn’t that contrary? Besides the obvious need for cash on hand to pay the increasing bills, isn’t the cash going to be worth less once the temporary, bankruptcy-driven deflation passes and the monetary policy-driven inflation kicks in?

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December 17, 2008 · Filed under bankruptcies, predictions

Dollar Continues to Slide

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?

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December 15, 2008 · Filed under dollar, euro, inflation