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

[WDCRob]

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

Blaze, if you're right what happens?

Rates slowly follow inflation up the ladder, with long-term stagflation?

Higher rates crash growth, followed by an immediate drop in rates? Then...?

If not Ka-Poom then what?

[blazespinnaker]

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

Hard landing and recession I suspect.

Why is lacker still dissenting when the recession indicators are ringing so loudly?

I think the issues we're looking at are exacerbated by the housing bubble, but I think the fundamental causes lie in the trillion dollar reserves built up by the Chinese.

The US can not throw up tairiffs, because that way is just a massive step backwards. The US needs to change how it does things and improve saving.

Letting the dollar devalue WILL not do that, in fact, it will do the opposite ... who the hell wants to save a devaluing dollar? It will just let inflation run rampant.

Keep the fed funds high, let the recession come on, and stay that way until the Chinese stop accumulating their reserves.

The US can not afford to have their entire economic future left in the hands of the Chinese.

[Finster]

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

the fed will defend the dollar if no one else does.

LOL!!! [insert hysterical laughter]

The Fed is in the business of driving the dollar down! What you're suggesting is that the wolf will rescue the hens. At best, the Fed will ultimately have destroyed the dollar to the point where the markets can't take it any more and will have to back off by raising rates to keep the dollar from diving too fast.

Why is lacker still dissenting when the recession indicators are ringing so loudly?

Inflation!

The US can not throw up tairiffs, because that way is just a massive step backwards.

Given that "forwards" seems to be forever in the direction of deeper imbalances and greater indebtedness, a massive step "backwards" should not be just dismissed out of hand. Remember that this country went from ragtag group of colonies to the greatest world power ever with far higher tariff levels than it has now - and significantly - little or no income tax. Over the past twenty years - as it has cut tariffs - the US has gone from being a creditor nation to the most indebted nation in all of history.

Yet we just reject the notion of tariffs uncritically with a turn of phrase no less casual than "Hi, howya doin'!"?

The US can not afford to have their entire economic future left in the hands of the Chinese.

Then why the heck did we hand it to them in the first place?

[jk]

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.

let me see if i follow your argument: ej's scenario is the most likely- the scenario in which the fed lowers rates and triggers a crash in the dollar. because the fed sees this most likely scenario, the most likely scenario will never happen.... hmmm. so the most likely scenario won't happen? perhaps you can define "most likely"?

[jk]

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

Keep the fed funds high, let the recession come on, and stay that way until the Chinese stop accumulating their reserves.

The US can not afford to have their entire economic future left in the hands of the Chinese.

insert picture of man holding gun pointing at his own head, saying "don't move or i'll shoot!"

we'll show those chinese! we'll keep our country in recession! they won't be able to sell us anything if we're all broke! we'll show them a thing or two!

[Finster]

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

insert picture of man holding gun pointing at his own head, saying "don't move or i'll shoot!"

we'll show those chinese! we'll keep our country in recession! they won't be able to sell us anything if we're all broke! we'll show them a thing or two!

More truth in this than most (including you ... ;-) might imagine. In very rough terms, Americans are short dollars, the Chinese long dollars. Assuming the Fed is beholden to Americans (perhaps a leap of faith...) which way do you think they would go?

[blazespinnaker]

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

insert picture of man holding gun pointing at his own head, saying "don't move or i'll shoot!"

we'll show those chinese! we'll keep our country in recession! they won't be able to sell us anything if we're all broke! we'll show them a thing or two!

This is precisely what volker did in the 70s and what Bernanke will have to do as well, except that instead of the gulf states it will be China this time, and instead of waiting until after China puts the screws (as opec did with oil), they will do it before.

We'll see soon enough who is right. I just happen to think that ka-poom is too dangerous compared to forcing americans to once again save.

[jk]

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

This is precisely what volker did in the 70s and what Bernanke will have to do as well, except that instead of the gulf states it will be China this time, and instead of waiting until after China puts the screws (as opec did with oil), they will do it before.

when volcker came in there was a national consensus that inflation was out of hand. it took a decade of rising inflation to get to that point. i think there might be a "volcker" in our future, but not til perhaps 2015.

[Finster]

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

when volcker came in there was a national consensus that inflation was out of hand. it took a decade of rising inflation to get to that point. i think there might be a "volcker" in our future, but not til perhaps 2015.

FWIW, I think you're correct. One potential fly in the ointment however, is that in the 1970s our official inflation stats aligned with the public's perception that inflation was high. Since then, the CPI has been rejiggered to show much less consumer price inflation. So we have officialdom remaining in denial about inflation. Hard to say what the net effect will be, but it seems possible inflation will have to get even more out of control this time around than in the 1970s before we get our next Volcker.

We can already see evidence of the disconnect. Economists looking at the ecodata stats see an economy doing great. Surveys of real people out in the real world show they are not feeling like things are going so well. There is a whole parade of pundits in the media trying to explain why, but I have yet to hear one nail the real reason. Inflation has been running a bunch higher that the official numbers say. And as a corrollary, that means real economic performance is a bunch lower than nominal performance as well.

[blazespinnaker]

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

Well, the idea that the fed doesn't see ka-poom is simply not concievable to me.

[jk]

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

Well, the idea that the fed doesn't see ka-poom is simply not concievable to me.

who said the fed doesn't see ka-poom? i think they see it on one side, deflation and debt-revulsion on the other, and are trying to walk the tight rope in between. but i also think they see ka-poom as less disasterous than deflation, so if they're going to slip off that rope, that's the side they prefer to move towards.

[blazespinnaker]

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

If deflation starts to occur, than the fed can ease. Not rapidly to rescue the economy from recession (as that will cause ka-poom), of course, but they can ease. I don't think deflation will occur with all the liquidity around here.

Again, though, the recession indicators are ringing very very loudly. Why is the fed dragging its heels on cutting rates?

I think they realise that there is too much liquidity flushing around out there and inflation expectations are too high, so a recession is the only way to go.

[Finster]

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

who said the fed doesn't see ka-poom? i think they see it on one side, deflation and debt-revulsion on the other, and are trying to walk the tight rope in between. but i also think they see ka-poom as less disasterous than deflation, so if they're going to slip off that rope, that's the side they prefer to move towards.

The Fed may see it now, but now it's too late. Greenspan had a chance to take a different course back in 1995-1996, but elected to ignore the inflationary evidence in soaring financial markets, preferring instead to pretend that it was some kind of extra-economic phenomenon. And make no mistake, it was not because he couldn't have seen it; there were plenty of voices in the financial press warning of the dangers of underwriting a financial bubble with all the liquidy the Fed was fostering, even as consumer price inflation remained quiescent.

[bart]

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

The Exchange Stabilization Fund history is now being charted and maintained monthly at
http://www.NowAndFutures.com/fed_watch.html#esf

ESF definition & links:
http://www.NowAndFutures.com/glossary.html#esf


Long term chart showing tradable trend changes in the dollar:





Same data, Jan 2005 through most recent data available

[Finster]

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

The Exchange Stabilization Fund history is now being charted and maintained monthly at
http://www.NowAndFutures.com/fed_watch.html#esf

ESF definition & links:
http://www.NowAndFutures.com/glossary.html#esf


Long term chart showing tradable trend changes in the dollar:
[Chart]

Same data, Jan 2005 through most recent data available
[Chart]

Thanks, Bart. I wonder if you would expand a little on what these charts mean to you. Are they intended for forex traders? Do they convey an actionable message for others as well? Or are they just general information relating to the expected course of the economy and financial markets?