Prediction: the fed will defend the dollar if no one else does

[blazespinnaker]

The dollar has shown some weakness lately, but I believe that the fed will defend the dollar if no one else does.

If we're seeing the end to the dollar tribute, then the fed will step in and either keep rates steady or even push them up.

Message to the world: give us your dollar tribute or pay the price with a worldwide recession. We're not going to let the dollar get crushed.

Even then, I can see the fed pushing the economy into a recession as a message to china to stop piling on the reserves. The US will not become beholden to china

I put 80% chance on this scenario happening, and I am looking to make a highly leveraged bet based on this.

[jk]

Re: Prediction: the fed will defend the dollar if no one else does

The dollar has shown some weakness lately, but I believe that the fed will defend the dollar if no one else does.

If we're seeing the end to the dollar tribute, then the fed will step in and either keep rates steady or even push them up.

Message to the world: give us your dollar tribute or pay the price with a worldwide recession. We're note going to let the dollar get crushed.

Even then, I can see the fed pushing the economy into a recession as a message to china to stop piling on the reserves. The US will not become beholden to china

I put 80% chance on this scenario happening, and I am looking to make a highly leveraged bet based on this.

i think the fed would let the dollar turn to wastepaper rather than risk a recession with all the debt in the system.

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

i think the fed would let the dollar turn to wastepaper rather than risk a recession with all the debt in the system.

That would risk hyperinflation and would lead to ka-poom, which I think is a macro economic doomsday. EJ is a smart guy, but I think the fed is just as smart and knows as well as he does the risks of that scenario.

I don't think the fed will risk ka-poom.

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

That being said - the US will go into recession next year, and it will be even worse because the fed will not cut rates as fast as they should.

Why do you think lacker is dissenting when recession indicators are ringing so high? It's because he's well aware of the trade defecit and the danger of China racking up all those dollar reserves.

In fact, the trillion dollar reserves have been all over main stream media... this will be used to stoke the nationalistic fires: "Americans, we must defend the dollar against the great red threat!"

Anyhow, I'm going to put my money where my mouth is.

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

i think the fed would let the dollar turn to wastepaper rather than risk a recession with all the debt in the system.

also, devaluing the dollar may lower the purchasing power of the debt, but it hikes up the interest payments to no end.

tanstaafl - there aint no such thing as a free lunch.

[jk]

Re: Prediction: the fed will defend the dollar if no one else does

also, devaluing the dollar may lower the purchasing power of the debt, but it hikes up the interest payments to no end.

you'll have to explain this statement. it seems to me that both the interest and principle payments get to be made in wastepaper. gov't revenues will rise as every taxpayer becomes subject to the alternative minimum tax - our stealth middle class tax hike. new deficit funding can be kept short duration. i hope you noticed that when bill gross predicted his new bond bull market he said keep duration relatively long but stay on the short end of the curve. i.e. buy perhaps 3-4 year zeroes. that's the end of the curve that the fed will take down - i want to say "take down first," since bernanke has made clear that the first step in avoiding a deflationary crisis will be purchasing somewhat longer dated paper.

[jk]

Re: Prediction: the fed will defend the dollar if no one else does

http://www.nytimes.com/2006/11/01/bu...l?ref=business

Mr. Rubin and the other dollar bears look a little like the skeptics of the real estate boom back in 2005. For years, those skeptics warned that things had gotten out of hand and that reality would soon reassert itself. And for years, they were wrong. The longer they were wrong, the more out of touch they sound.

and we all know what has started to happen to housing.....

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

you'll have to explain this statement. it seems to me that both the interest and principle payments get to be made in wastepaper.

Ok, let's go with your scenario and assume for a moment the dollar has the value of wastepaper.

How do you propose to buy gas for your car in that world? How does walmart buy from asia with wastepaper?

And who is going to buy waste paper bonds? Bonds that return more wastepaper don't really have a lot of value. Cheap bonds equates to extremely high interest rates.

I guess if all the bonds were 30 year fixed then I suppose this wouldn't be a big deal (of course, the US wouldn't be able to borrow any money but hey, I guess that's an easy way to get rid of the deficit!)

[jk]

Re: Prediction: the fed will defend the dollar if no one else does

Ok, let's go with your scenario and assume for a moment the dollar has the value of wastepaper.

How do you propose to buy gas for your car in that world? How does walmart buy from asia with wastepaper?

prices will be high both nominally and real. that's how. it will cost many wastepaper dollars.

And who is going to buy waste paper bonds? Bonds that return more wastepaper don't really have a lot of value. Cheap bonds equates to extremely high interest rates.

short end will be relatively low [rates] because the fed will be monetizing. further out on the curve is hard to predict. the slower the economy the further out on the curve will be kept low by the fed.

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

prices will be high both nominally and real. that's how. it will cost many wastepaper dollars.



short end will be relatively low [rates] because the fed will be monetizing. further out on the curve is hard to predict. the slower the economy the further out on the curve will be kept low by the fed.

I'm sorry, you're confusing me terribly here. What bond investor is going to buy bonds when the government behind them doesn't care about their value? Why loan money to a country that devalues its debt?

The fed has a purpose in life, and that purpose is to keep inflation low.

[jk]

Re: Prediction: the fed will defend the dollar if no one else does

I'm sorry, you're confusing me terribly here. What bond investor is going to buy bonds when the government behind them doesn't care about their value? Why loan money to a country that devalues its debt?

interesting assumption in this remark. it used to be the case that bonds were sold to u.s. citizens and institutions. how times change.

and sometimes they change even more: countries "diversifying" their reserve holdings are trying to tiptoe away from the dollar. no one wants a dollar crash.

but ultimately, you are right: no one will want to buy u.s. bonds. u.s. citizens don't have the resources, they're in debt. and after about 10 years, say, of ka-poomlets [i like that] ratcheting up nominal rates but never getting ahead of inflation, someone will again say that bonds are certificates of guaranteed confiscation. at that point rates will go really high.

The fed has a purpose in life, and that purpose is to keep inflation low.

you forget- the legislation directing the fed says it has 2 purposes. the fed is not the bundesbank. the fed is supposed to control inflation, and the fed is supposed to maintain growth and employement.

bernanke is an expert on the great depression. in his famous helicopter speech he was very clear about his belief that deflation could be avoided. steering between the scylla of inflation and the charybdis of deflation, the feeling will be that inflation can always be dealt with later, manana.

[fourthirtysix]

Re: Prediction: the fed will defend the dollar if no one else does

is it possible that we get a little bit of both? a somewhat devalued dollar and a recession, but neither completely crippling?

that wouldn't be a soft-landing, but it would seem to avoid the disasters of deflation or hyperinflation... ?

[jk]

Re: Prediction: the fed will defend the dollar if no one else does

is it possible that we get a little bit of both? a somewhat devalued dollar and a recession, but neither completely crippling?

that wouldn't be a soft-landing, but it would seem to avoid the disasters of deflation or hyperinflation... ?

some of each is "stagflation." and i think that is probably the most likely scenario. not the stuff of disaster movies, although i think the disaster scenarios are possible.

here's a game: what probabilities do you assign to a. hyperinflation, b. deflation, c. stagflation, d. healthy growth, e. some new bubble?

my guesses:
a. 10%
b. 5
c 75
d 0
e. 10

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

I disagree .. I think EJ's scenario is the most likely one, if the fed cuts they will do so dramatically and cause a crash in the dollar leading to ka-poom.

I think the fed see's ka-poom as well as EJ does and that's why I think they will hold / hike.

[blazespinnaker]

Re: Prediction: the fed will defend the dollar if no one else does

The US must be forced into saving, otherwise the US is beholden to the Chinese. The only way to force them into saving is by holding the fed funds rate high.