If the view of
this crowd on the USD is more akin to Mr. Billâ€™s predicament, then its view on
inflation is more akin to Chicken Little...the sky is falling. Deficit
spending and Fed monetization is inflation in spades. Never mind that
what money has been created is a drop in the bucket of wealth that was
destroyed by the crisis. Nor that banks are more comfortable earning zero
holding reserves t the Fed rather than lending them to businessâ€¦large ones,
much less small ones. And households donâ€™t want any more debt. They
want to pay it down â€“ just look at the huge decline in consumer credit in the
last 7 months. Supply and demand curves for credit have both shifted
inward. Do the Rick Santelliâ€™s of the world think the Fed is
relishing in the fact that it has expanded its balance sheet by a factor of 2
by adding zeros to its balance? Or are Fed officials masters of deception
and really donâ€™t mean it when they say the balance sheet will contract and
liquidity provisions reversed once the private sector is on a sustainable path
(basis for a dollar recovery)? But illogic seems to run thick in the
policy discourseâ€¦gold is up because of inflation expectations are elevated in
one of the least liquid markets and bond yields are low not because inflation
expectations and monetization are an issue but because of manipulation in the
most liquid asset market (FX excluded).
Geithner, Bernanke and any reasonable observer agrees that the current policy
mix is unsustainable and over time and will leave the USD a second rate
(non-reserve status) currency in the long-run unless deficits (long-term
liabilities) and Fed balance sheet expansion are first contained and then
reversed. This is a particularly difficult problem if you believe the
crisis has changed US consumer behavior permanentlyâ€¦with the aging boomers and
among them I think it hasâ€¦growth as a ticket out of accommodative policy
reversal is going to have to come from some other non-governmental source like
exports or a major new technology revolution (energy, digital, medicalâ€¦) not
now foreseen (wealth creation machine). But these are long-run stories
and what matters now is the next 12 months. Positive fat tail outcomes
are no way to plan the long-run and in the medium-run US authorities are going
to have to do what they have been unable to to dateâ€¦convince markets they can
downsize (in either political party).
And oil priced
in euros or yen or yuan? UK Independent report has been denied by every
state mentionedâ€¦no secret meeting, no clandestine effort to end the pricing of
oil in USD unless we count Iran and Venezuela.
China wonâ€™t stand for a weaker dollar we are
told by the Mr. Bills of the capital markets. What BS. China is so into the USD that there is no way
out. For China to say donâ€™t let the USD weaken or else
after amassing $3trln in reserves is laughable. Where is the gun pointed
at China making it buy dollars to peg the yuan
for the last decade? China was free to choose. They could
have bought other currencies or none at all and helped prevent the build-up in
global imbalances that allowed cheap credit to dope markets and regulators into
excessive complacency (stupidity). China holds up half the sky of this gigantic
problem (bad policy here and there). And in another irony the
neo-Austrian set mostly is infatuated with Chinaâ€¦the only other seriously
planned economy since the collapse of the Soviet Unionâ€¦reminds me of the hero
worshipping of Japan in the 1980â€™sâ€¦letâ€™s not confuse mercantilism with free
So raise the
Mr. ($) Bill alarm on the USD loudly and often and the vocal minority can
hijack public discourse and policy to reverse the USD fortune. Malpass
said all Geithner needs to do is say US wants a stronger dollar rather than a
strong dollar and Mr. Bill will live another day. But what about
the fact that the market is pricing the USD (a floating currency) and based on
fundamentals? The USD is back to where it was before the crisisâ€¦weakening
as markets normalize and worldâ€™s investment and trading classes rush from risk
to risk free is no longer part of the mindset. If the RBA is the
spark to a prairie fire of rate hikes across G20 in the next 6 months, I will
eat my didgeridoo. Frankly the RBA will be hard pressed to continue raising
rates alone short of taking its currency to levels that may make China (pegged to USD) look elsewhere for
Aussie minerals. The market has priced 150bps tightening through June
2010. My guess is we will be lucky to see half that and the RBA may end
up like the BOE (in 2007) with hikers remorse.
Lastly, a weak
dollar is what the doctor ordered. If you believe in the vastly liquid
market of US Tsys is a better indicator of inflation expectations than the
rarified air of the gold market, low inflation is on the horizon indefinitely
and Fed inflation credentials are fully intact. Why would any reasonable
central banker or finance minister want to oppose the only escape hatch for
private growth by engineering (assuming it is possible) a USD rally?
Printing money with a low multiplier is not inflationary outside of asset
prices. Ahead the c bankers may have to lean into asset prices some to
prevent new bubbles from forming while keeping traditional and non-traditional
policy accommodative as the real economy crawls back to life. But right
now is not the time to rush to the defense of the USD and I would go with the
IMFâ€™s WEO conclusion on exchange ratesâ€¦the USD is not significantly undervalued
or overvalued. Asia
is where the misalignments are in FX and to a lesser extent Latin Americaâ€¦pre-emerging-market currency crisis
norms should be permitted. Inflation risks are real in Asia much sooner than they are in the US, Europe or Japan and these economies scream out for
I think the
IMF, BIS and G20 need to look at limits on government foreign reserve
accumulation. A sizeable chunk of the worldâ€™s savings is in foreign
reserves held by central banks who actively manage their currencies (mostly
emerging markets and Japan pre-2004). In light of the need for risk
capital in the world to fill massive withdrawal of private risk capital, having
all these global savings (FX reserves) in cash and government paper is hugely
inefficient on top of being distortionary. Maybe it is time for
regulatory reform for the regulators.
Rule of thumb
is be careful of analysts and economists who raise politics to a principle and
then start with economic analysis. No I am not throwing stones in a glass
house. This is kind of like asking a trader long several yards of AUD against
USD to explain what might make the USD recover in the near-term.
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