Here We Go Again – Dollar Devaluation

In December the Fed announced that it would target Fed Funds at 0 to 1/4% and it also announced that it would be in the market for agency debt and treasuries, effectively monetizing the debt of the United States.  The dollar, which had been strengthening in the flight to quality as risk positions were eliminated in the aftermath of the financial market meltdown, dropped sharply.   Yields spiked down on the theory that the Fed would be buying treasuries in competition with those fleeing risk.  Importantly, this also put an end to the commodities drop from July of 2008 to December 2008.   Over the next few months, markets fluctuated in a range near their December levels and the dollar strengthened as people were worried whether the world was ending.

As is became clear in the spring of 2009 that things had stabilized somewhat, the implications of extraordinary money creation by the Fed, along with a ridiculously wasteful US stimulus spending bill and a less wasteful Chinese stimulus plan started to become clear and markets reacted.  Ten year treasury yields have just about doubled in 6 months.  Crude oil prices have more than doubled.   Even Corn prices have risen 55%  despite the decimation of the chimerical ethanol industry.  Such price moves have happened in most commodities as it has become clear that there is a rising long term risk of inflation.

The Fed’s position has been made more difficult by an $800 Billion “stimulus plan” that will be mostly wasted and pending Demunist legislation that promises wartime deficits as far as the eye can see.  But an independent Fed has to be the entity that backstops the system by defending the dollar.  And the only way it can do this is by convincing markets that it will not let the situation get out of hand.  Unfortunately, a guy with the nickname “Helicopter Ben” is most unlikely to be counted on to do so.  As a result we will likely face a dollar crisis, with the result that debt yields will rise massively, as will the cost of all commodities.  As a matter of policy, should the cost be bourne by those who use commodities, notably oil and gas?  This would probably suit the Demunists and Commocrats as it helps their drive to go green.  It is a steep price to pay though and could lead to world unrest.  It also shifts massive amounts of wealth to really bad people all over the world; the Saudis, Putin’s Russia, Chavez in Venezuela, Iran and so forth.  It would be better if the Fed showed some mettle and kept a lid on commodity prices by raising rates, even if only a little.  They may even find that it helps keep long rates in line to help the housing market, even if it costs banks a little as it flattens the Yield Curve a bit.  The bottom line is that authorities cannot create a painless economy, no matter what democratic keynesians say.  The sooner the pain is felt, the better off the world will be in the long run.

If the Fed would only get some balls, we could silence the noise coming from the worlds leading autocracies about dropping the dollar as the world’s reserve currency.  Sadly I would bet that this will not happen.  The world will lose the dollar on Obama’s and the Demunist’s watch.

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