Getting tired of people blaming Obama or Bernanke for trashing the dollar? I am. Critics cite deficits, borrowing, quantitative easing/”printing” as reasons. I also frequently hear people attacking Greenspan for his “easy money” policies which helped fuel the housing bubble (I agree), but never mention this along with the decline in the dollar. Take a look at the chart below. It’s clear the bulk of the dollar’s decline was under Bush/Greenspan, though Bernanke has presided over a significant drop too. I hold Obama nearly blameless here, except to the extent his politics have focused in the wrong places (healthcare and hardening the opposition into stupid debt ceiling debates). Read more »
The Fed’s big announcement yesterday has been dubbed “QE2” which short for “quantitative easing part II”. QE is Fed-speak for monetizing the national debt, otherwise known as “printing money”. It is not actually equivalent to printing money, at least until the program becomes permanent. But this post is not about the implications of QE. Rather it is about the strange trading activity around the announcement.
You see, QE2 has been rumored, floated, leaked, discussed, debated and reported on since before Labor Day. That the Fed was planning some quantitative easing was confirmed and well known before the actual announcement. Thus the only thing “new” in the announcement was the exact dollar size of the program, the exact timing and the wording of the Fed’s intensions. Even here, the size of the program was pretty well known by Wall Street. So, the financial markets expected this event with stronger than usual conviction in what it would entail. In fact, “everyone” claimed that QE2 was already “baked in to” expectations with traders having positioned themselves well ahead of the actual announcement.
Instead of a yawn, we got incredible volatility in yields. Bond yields typically don’t move much in one day’s trading session, but yields moved a week’s worth in just a few minutes. Why the surprise? To make matters even more interesting, that spike in yields reversed entirely and fell even further at today’s opening. I’m puzzled as to why the violent trading reaction took place. Have a look: Read more »
Since I wrote the 3-part piece about the dollar (parts I, II, III), some nasty things have occurred in Washington. It was just one-month ago that I made the following warning in “Part III: Can the Dollar Weaken Anyway?“
“Another very bad outcome for the dollar may happen if Congress starts dismantling the Fed’s independence”
Guess what? Read more »
Many commentators still seem to be screaming that hyper-inflation is around the corner. The crux of their argument is that the Fed has pumped hundreds of billions into bank reserves. There is a chart circulating, which you may have seen, illustrating this explosion of credit. After all, reserves normally translate directly into fresh lending. I have reproduced the chart for you here: Read more »
A while back, last September 9th to be exact and right before the world really fell apart, I took some flack for calling the Dallas Fed President Richard Fisher the economic idiot of the week. If you don’t recall why, let me help you. As the world was rapidly deflating in a giant credit crunch, Mr. Fisher’s position was described in the Fed’s meeting minutes as
“While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation.” [Emphasis mine]
A few months later he changed his tune and accepted that the right thing to do during a credit crunch is not tighten credit, but rather expand credit and liquidity. Thankfully, Bernanke already knew this.
The Fed doesn’t get it, at least not entirely. While I normally don’t read the minutes to the Federal Open Market Committee meetings, I thought they might shed light on the Fed’s thinking at this critical stage in the economy. Here is a paragraph from the minutes of the August 5th meeting: Read more »
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