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

[bart]

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

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?

The key is in that first chart, the one with the red trend lines. If you look at when the trend lines are broken on a going forward basis, you'll see that those breaks correlate highly with changes in direction of the value of the dollar as expressed in the USDX index. Basically and bottom line, it looks like we're very close to another down move in the USDX, or at the very least a sideways motion.

I don't think they're very useful for forex traders, since both there's a large lag in reporting and that they're only monthly, but rather for anyone who has dollars/bonars.

I thought it was also interesting in that I believe it shows the Fed & Treasury are intervening, when they say they're not. They're using "weasel words" - the actual ESF currency account isn't moving much but the others are.




Note that I made a small change and added another dotted trend line on the chart, based on some other non public data and an educated guess.

[Jim Nickerson]

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 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.

Bush’s Chernobyl economy; hard times are on the way
By Mike Whitney
Online Journal Contributing Writer


http://onlinejournal.com/artman/publ...cle_1411.shtml

"Most economists believe that Fed Chairman Bernancke will be forced to lower rates sometime in 2007 to try to stimulate the economy and to affect a “soft landing” in the housing market, but don’t count on it.

I believe the Fed is more likely to either keep rates the same or raise them to outpace the anticipated increases in Europe and Asia. The reason for this is simple: it presently takes nearly $2.5 billion per day to maintain our current account deficit. To continue to attract foreign capital, US Treasuries must offer a higher rate of return than their foreign competitors. Now that the economies in Europe and Asia are growing, their interest rates are going up accordingly (to slow inflation). That means that the only way that America can continue to expand its debt, through the exchange of fiat currency for resources and manufactured goods, is by raising the return on Treasuries. And, that is probably what Bernanke will do, even though it will skewer the struggling American worker and the US economy at the same time.

The secret to running the global economic system is to control the issuance of currency and thereby be in a position to expand one’s own debt as one sees fit. The Federal Reserve must preserve its “dollar hegemony” if it wants to maintain the greenback as the world’s “reserve currency.” To accomplish that, the dollar must stay one step ahead of its competitors (higher rates) and prove that it is on solid financial footing. [emphasis JN]

This is impossible now that the US economy is contracting, so Washington has decided to do the next best thing; corner the oil market. By controlling Middle East oil, US policy-makers believe that they can force foreign nations to accept the debt-plagued greenback regardless of the faltering US economy. It is no different than any other extortion racket.

If the plan succeeds the dollar will remain the de facto international currency. But it is a difficult task and the escalating violence in Iraq suggests that the results are far from certain."

I certainly am not knowledgeable about what the Federal Reserve Bank may do or why, but if there is any validity to the notion that the truly wealthy people are controlling this country through political system and the banking system (transcript of interview of G. Edward Griffin author of "The Creature from Jekyll Island, A Second Look at the Federal Reserve" http://www.financialsense.com/transc...18griffin.html), then despite whoever Mike Whitney is, it seems to me that he puts forth a cogent argument of what the FRB might like to do in order to maintain bonar hegemony. Based on the little I know, it seems that not lowering interests rates in the US or even raising them over time, despite screwing all those who will not maintain their homes, is tenable--from the point of view of the wealthy elite.

I've thought through the events, as I recall them, that led the US into Iraq, and I bought the arguments regarding WMD. I think were we to go through that scenario again from scratch, I would buy the arguments again. If it were to be a fact that the invasion's deepest political and economic goal was about oil supply, then regardless of all the negativism apparently in the public's mind about the war, I expect it will be a long time before the US leaves Iraq. If anyone reads this I imagine there will be some counter arguments, but to me the the resolution of what is going to happen to rates, the bonar, and in Iraq remains to be played out to see what are the facts.

[Finster]

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

[B]Bush’s Chernobyl economy...

I certainly am not knowledgeable about what the Federal Reserve Bank may do or why, but if there is any validity to the notion that the truly wealthy people are controlling this country through political system and the banking system (transcript of interview of G. Edward Griffin author of "The Creature from Jekyll Island, A Second Look at the Federal Reserve" http://www.financialsense.com/transc...18griffin.html), then despite whoever Mike Whitney is, it seems to me that he puts forth a cogent argument of what the FRB might like to do in order to maintain bonar hegemony. Based on the little I know, it seems that not lowering interests rates in the US or even raising them over time, despite screwing all those who will not maintain their homes, is tenable--from the point of view of the wealthy elite.

I've thought through the events, as I recall them, that led the US into Iraq, and I bought the arguments regarding WMD. I think were we to go through that scenario again from scratch, I would buy the arguments again. If it were to be a fact that the invasion's deepest political and economic goal was about oil supply, then regardless of all the negativism apparently in the public's mind about the war, I expect it will be a long time before the US leaves Iraq. If anyone reads this I imagine there will be some counter arguments, but to me the the resolution of what is going to happen to rates, the bonar, and in Iraq remains to be played out to see what are the facts.

Every indication is that the Fed will keep rates as low as possible until the forex markets force its hand. Despite all the tough talk about being vigilant on inflation, it behaves as if supporting the housing market is it bigger concern. I don't base my investing on forecasting the Fed, but it appears the Fed will not raise rates as long as any portion of the economy is perceived to be weak, and is likely to cut on any firm evidence of discomfort.

That is, until and unless the dollar goes into free fall. That is, in a nutshell, a strong argument for being on guard against a falling dollar. The year 1987 comes to mind as a rough template for the 2007 outlook. In that year, first the dollar dropped, then bonds (interest rates rose), then stocks.

[jk]

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

i think the fed is concerned first and foremost with the viability of the banking system and the broader financial system. they may not care if joe sixpack loses his house, but they care about the institution that is sitting on the mortgage backed security with its value impaired. the mortgage backed, and more broadly the asset backed market is enormous. a severe recession will destroy too many institutions. inflation, especially inflation that does not show up in cpi-u [which is used to adjust social security and tips returns] provides a manageable solution.

[EJ]

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

i think the fed is concerned first and foremost with the viability of the banking system and the broader financial system. they may not care if joe sixpack loses his house, but they care about the institution that is sitting on the mortgage backed security with its value impaired. the mortgage backed, and more broadly the asset backed market is enormous. a severe recession will destroy too many institutions. inflation, especially inflation that does not show up in cpi-u [which is used to adjust social security and tips returns] provides a manageable solution.

"Central bankers are against inflation like priests are against sin. But few are out and out fundamentalists." - Guy Quaden

[Spartacus]

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

There's an aritcle ... I can't find it now DAMN ... HATE when that happens
oh .. just a minute ... I'm back

search for "inflation numbers had undergone a few revisions"

http://www.2000wave.com/article.asp?id=mwo111006

so the FED rates were lowered to 1% FOR NO GOOD REASON, and at least one governor knows it.

What will they do when presented with a REALLY GOOD REASON? I think for the really good reason of a housing bubble collapse, the rates will eventually be lowered faster, and maybe further.

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.

[medved]

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

What will they do when presented with a REALLY GOOD REASON? I think for the really good reason of a housing bubble collapse, the rates will eventually be lowered faster, and maybe further.

Not necessarily. The Fed will do tough-on-inflation talk. The rates will stay where they are, maybe go down a bit, maybe go up a bit. At the same time they will create housing PPT to prevent the housing bubble Ka. It will give them a few more years to inflate the next bubble.

m.

[Spartacus]

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

You give them too much credit (pun intended).

Entire countries full of geniuses have been blinded by theory (communism).

Surely a bunch of WASPs are just as susceptible, especially given that they have institutional incentives to be blind (herd bureaucratic thinking, "get published" by supporting orthodox theory, etc ...) .

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.