Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18
Stock Market Uptrend Resuming? - 11th Mar 18
Bond Market Interest Rate Yields Are Rising Again… Stocks Are on Thin Ice - 11th Mar 18
Death of Europe's Greenest City, Police State Sheffield Labour Council to Fell 50% of Street Trees - 11th Mar 18
Do All Bull Stocks Markets Need to Have a Bearish Divergence? - 11th Mar 18
An Inflation Indicator to Watch, Part 3 - 11th Mar 18
Online Stock Trading Tips - Tips about Online Trading & Day Trading - 11th Mar 18
NDX makes a new high. What does that mean? - 10th Mar 18
Blue Chip Companies on Track for $800 billion Buyback Record in 2018 - 10th Mar 18
Cheap Gold Stocks Basing - 10th Mar 18
An Introduction to Online Forex Trading - 10th Mar 18
Sheffield Police State as Tree Protesting Citizens Are Snatched off the Streets! - 9th Mar 18
Riding the Bitcoin Wave - 9th Mar 18
Are We in Late Cycle? Implications for Gold - 9th Mar 18
US Bond Market 3 Amigos Bottom Line - 9th Mar 18
The Stock Market Bubble Conversation - 9th Mar 18
The Last Great Myth of Every Financial Market Euphoria - 9th Mar 18
London Property Market Sees Brave Bet By Norway As Foxtons Profits Plunge - 8th Mar 18
Casino and Bingo - A Brief Statistics - 8th Mar 18
Stock Market Shrugs Off Trade War Fears, But Will It Go Higher? - 8th Mar 18
Gold Stocks & Silver Oversold but Not Gold Price - 8th Mar 18
Benefits of Using Same Day Loans In Emergencies - 8th Mar 18
Permanent Life Insurance: Is it a Waste of Money or a Valuable Investment? - 8th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

Fed Slashing the U.S. Dollar, The Economic Future is Ugly

Currencies / US Dollar Oct 13, 2010 - 05:50 AM GMT

By: Mike_Whitney


Best Financial Markets Analysis ArticleThe Fed has has hinted that it will launch a second round of quantitative easing (QE) sometime after its November 2 meeting. The anticipated intervention has been widely criticized, but for all the wrong reasons. Fed chairman Ben Bernanke knows that adding another $1 to $1.5 trillion to bulging bank reserves will likely have little effect on aggregate demand. Nor will it lower unemployment now hovering at 9.7%. It will, however, send a message to trading partners (re: China) that the Fed is serious about reducing destabilizing trade imbalances that siphon-off domestic stimulus, increase unemployment and keep the dollar perilously overvalued. In other words, the Fed's action is the first volley in what is likely to be a protracted currency war that leads to the final demise of Bretton Woods 2.

Here's a summary of this weekends IMF meetings of Finance Ministers in New York from Bloomberg:

"Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism….

“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”

So, what does that mean in plain English?

It means the US is determined to stave off deflation by forcing China to let its currency appreciate. It also means that the Obama administration finally realizes that its attempts to reduce unemployment or spark a recovery will continue to fail as long as stimulus is effectively negated by the surge in imports.

Here's a blurp from Angry Bear which explains what's going on:

"Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $). That mean that the increase in imports was 87.5% of the increase in domestic demand.

To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new "freshwater" theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately." (Trade in the national accounts,

So, the stimulus--that would have been generating jobs and demand within the US--is being exported to countries that want to keep the dollar propped up to maintain the present arrangement, that is, they want to continue to expand their manufacturing base and keep unemployment low while the US languishes in a permanent recession.

Bretton Woods 2, by the way, is the arrangement under which the US willingly runs large current account deficits with the assurance that trade partners would recycle the proceeds into US Treasuries, Agencies and equities. Naturally, this turned out to be a real boon for Wall Street as surplus capital has helped to fuel massive bubbles in all manner of garbage bonds that enriched the principles at the big brokerage houses.

So, what is Bernanke's strategy?

First, we have to understand what the Fed is doing and the effect it's having on global finances. Here's an excerpt from the Wall Street Journal which provides a good summary:

"Emerging-market economies from South Africa to Brazil to Thailand are bearing the brunt of easy-money policies in the developed world, as money flows to higher-yielding markets, pumping up currencies and complicating economic policy.

The Fed is flooding markets with liquidity, Japan is flooding the markets with liquidity and the U.K. is flooding markets with liquidity. The trouble is, a lot of that money isn't staying where it was put," says David Carbon, an economist at DBS in Singapore.

Investors borrow money at near-zero interest rates in the struggling economies of the developed world, and shuttle it to countries such as Indonesia, Brazil and South Africa, where interest rates are higher and growth rates more robust....

"The current policies of the developed countries are leading to very significant capital flows into some of the emerging countries. This is putting upward pressure on exchange rates," said South African Finance Minister Pravin Gordhan, chairman of the Group of 24." (Easy Money Churns Emerging Markets, Alex Frangos, Wall Street Journal)

Bernanke's zero-rate policy and the prospect of ongoing rounds of quantitative easing have put finance ministers everywhere in a frenzy. Some countries--notably South Korea and Brazil--have already taken steps to slow capital flows. As yet, the effectiveness of these measures remains unknown.

Naturally, capital seeks the best rate of return, which is why it is exiting the US (which is in the throes of a long-term slowdown) for greener pastures in China and emerging markets. That movement drives up the value of local currencies and creates lethal asset-price bubbles. The Fed is intensifying this process (via QE) to break the back of Bretton Woods 2 and force the dollar down. Eventually, the flood of liquidity will force foreign trade partners to accept a cheaper dollar thus restoring US export competitiveness and a way out of recession without raising workers wages. (The Fed's approach is grounded in class warfare.)

Tim Duy sums it up in a brilliant post that shines a light on the Fed's real objectives. The article should be read in its entirety, but here's a brief clip:

"The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly." (The Final End of Bretton Woods 2?, Tim Duy, Fed Watch)

By Mike Whitney


Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules