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Friday February 6, 2009 - 16:57:17 GMT
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We are going with Fischer on this one!

Key News
• The U.S. economy lost 598,000 jobs in January, as the jobless rate rose to 7.6%. Total job losses since the recession started in December 2007 to 3.6 million.

“You can observe a lot by watching.”

         Yogi Berra

FX Trading – We are going with Fischer on this one!
A was chatting with a friend of mine who works at a firm in Chicago; it went something like this:

Friend: A lot off rhetoric out of Washington last night
Me: And your point is...LOL
Friend: Trying to coax the market into a sense of security
Me: Sure...that'll do it
Friend: For 120-minutes

Point being, all the money the Washington gang has thrown at the economy already, one could say the job market is telling us and them it ain’t working.  And may be suggesting that a new tack might be in order; but it seems more of what isn’t working is headed our way.

(Chart unavailable in text format.) 

Source: The Wall Street Joural

So, despite the rally in stocks this morning, it is most likely another mini false dawn, about 120-minutes in the scheme of things as my friend so aptly sums up.

Anybody else get the feeling our government is heading too quickly down the wrong policy road?

Below comes from an article I wrote for another publication to be published tomorrow, but you get a sneak peak at the excerpt, luck you I am sure you are saying to yourself…LOL.  Keep in mind, I am not an economist, nor do I ever wish to be confused for such a person—my higher math skills are a bit lacking and I tend to live in the real world.  Anyway, here is my summation on the debate where more stimuli will really help.  It boils down to whether you believe Irving Fischer or Milton Friedman was right. 

…Let me explain the term monetary velocity, because it is crucially important to this battle for the hearts and minds of economically-inclined everywhere, and for real people who are very concerned about what’s playing out.

Monetary velocity effectively means how fast money is circulated in the economy—the speed in which it is spent.  And it is a key measure in an economic equation with important moving parts that determine growth and pricing.  Now stay with me, this is important and I think help you understand this very important debate once you get this simple equation in your head:

M x V = P x O
M = Money Supply
V= Velocity
P = Price Level
O= Economic Output

This simple equation covers it all in this battle.  Milton Friedman (and Ben Bernanke and those in control of the present US economic policy believe that if the “M” in this equation is lifted, it will impact prices (reduce the deflationary scare) and output (economic growth) accordingly.

But here is the rub: When debt levels reach such huge levels, people get scared and save and hoard and use money to pay down debt.  They don’t take on more debt or run out and do more spending just because the money supply has been increased by the government.  In fact, more money pumped into the system only adds to the total debt in the economy and therefore prolongs the downturn.
The viable policy is to accept the fact that “V” (monetary velocity) shrinks dramatically at times like these—thus we have the big dip in “O” (output) and “P” (prices); this IS the way the market cleanses the system by paying down the debt and rebuilds reserves (by increased consumer and institutional savings) to provide the eventual pool of capital for fresh growth once the debt in the system is removed.

And once the debt is removed, monetary velocity “V” increases to more normal levels; therefore tinkering with money supply isn’t necessary.

Thus, Black Swan sides with Irving Fischer on this one despite that we are huge Milton Friedman fans on so many other issues.  If you want to read his landmark paper, “The Debt-Deflation Theory of Great Depressions,” you can find it here.  Very enlightening in that it shows we have seen this all before and governments are still wondering how to appropriately respond.  It is yet another reason why economics has absolutely no right to include the word “science” anywhere within the same paragraph. 

The dollar is getting a bit spanked today, but overall acting will in light of the dismal job news.  We still believe the global economy is in for a sustained period of risk aversion, far longer than market cheerleaders and dollar bears now expect.  If we are right here, we think the probabilities still have to favor the dollar trending higher.

But, given that we trade our own money and give much back to Mr. Market at times, we are painfully aware that anything we do and talk about here has nothing to do with science.  So stay tuned.

Have a great weekend.

Black Swan Capital LLC


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