Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Slashing the U.S. Dollar, The Economic Future is Ugly

Currencies / US Dollar Oct 13, 2010 - 05:50 AM GMT

By: Mike_Whitney

Currencies

Best Financial Markets Analysis ArticleThe Fed has has hinted that it will launch a second round of quantitative easing (QE) sometime after its November 2 meeting. The anticipated intervention has been widely criticized, but for all the wrong reasons. Fed chairman Ben Bernanke knows that adding another $1 to $1.5 trillion to bulging bank reserves will likely have little effect on aggregate demand. Nor will it lower unemployment now hovering at 9.7%. It will, however, send a message to trading partners (re: China) that the Fed is serious about reducing destabilizing trade imbalances that siphon-off domestic stimulus, increase unemployment and keep the dollar perilously overvalued. In other words, the Fed's action is the first volley in what is likely to be a protracted currency war that leads to the final demise of Bretton Woods 2.


Here's a summary of this weekends IMF meetings of Finance Ministers in New York from Bloomberg:

"Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism….

“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”

So, what does that mean in plain English?

It means the US is determined to stave off deflation by forcing China to let its currency appreciate. It also means that the Obama administration finally realizes that its attempts to reduce unemployment or spark a recovery will continue to fail as long as stimulus is effectively negated by the surge in imports.

Here's a blurp from Angry Bear which explains what's going on:

"Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $). That mean that the increase in imports was 87.5% of the increase in domestic demand.

To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new "freshwater" theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately." (Trade in the national accounts, angrybearblog.com)

So, the stimulus--that would have been generating jobs and demand within the US--is being exported to countries that want to keep the dollar propped up to maintain the present arrangement, that is, they want to continue to expand their manufacturing base and keep unemployment low while the US languishes in a permanent recession.

Bretton Woods 2, by the way, is the arrangement under which the US willingly runs large current account deficits with the assurance that trade partners would recycle the proceeds into US Treasuries, Agencies and equities. Naturally, this turned out to be a real boon for Wall Street as surplus capital has helped to fuel massive bubbles in all manner of garbage bonds that enriched the principles at the big brokerage houses.

So, what is Bernanke's strategy?

First, we have to understand what the Fed is doing and the effect it's having on global finances. Here's an excerpt from the Wall Street Journal which provides a good summary:

"Emerging-market economies from South Africa to Brazil to Thailand are bearing the brunt of easy-money policies in the developed world, as money flows to higher-yielding markets, pumping up currencies and complicating economic policy.

The Fed is flooding markets with liquidity, Japan is flooding the markets with liquidity and the U.K. is flooding markets with liquidity. The trouble is, a lot of that money isn't staying where it was put," says David Carbon, an economist at DBS in Singapore.

Investors borrow money at near-zero interest rates in the struggling economies of the developed world, and shuttle it to countries such as Indonesia, Brazil and South Africa, where interest rates are higher and growth rates more robust....

"The current policies of the developed countries are leading to very significant capital flows into some of the emerging countries. This is putting upward pressure on exchange rates," said South African Finance Minister Pravin Gordhan, chairman of the Group of 24." (Easy Money Churns Emerging Markets, Alex Frangos, Wall Street Journal)

Bernanke's zero-rate policy and the prospect of ongoing rounds of quantitative easing have put finance ministers everywhere in a frenzy. Some countries--notably South Korea and Brazil--have already taken steps to slow capital flows. As yet, the effectiveness of these measures remains unknown.

Naturally, capital seeks the best rate of return, which is why it is exiting the US (which is in the throes of a long-term slowdown) for greener pastures in China and emerging markets. That movement drives up the value of local currencies and creates lethal asset-price bubbles. The Fed is intensifying this process (via QE) to break the back of Bretton Woods 2 and force the dollar down. Eventually, the flood of liquidity will force foreign trade partners to accept a cheaper dollar thus restoring US export competitiveness and a way out of recession without raising workers wages. (The Fed's approach is grounded in class warfare.)

Tim Duy sums it up in a brilliant post that shines a light on the Fed's real objectives. The article should be read in its entirety, but here's a brief clip:

"The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly." (The Final End of Bretton Woods 2?, Tim Duy, Fed Watch)

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in