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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (3177)12/11/2003 6:33:08 PM
From: Wyätt Gwyön  Read Replies (1) of 110194
 
Add that term to "currency defense", and you have the formula for 2004

there are only two ways for a country to directly defend its currency:

Door Number 1: Sell other currencies for the national currency. this option is not open to the US since we do not have significant forex holdings (especially when compared to foreigners' holdings of USD)

Door Number 2: Raise interest rates. this option is the one i believe the Fed will AVOID AT ALL COSTS, for reasons previously enumerated.

therefore, in terms of currency rise, all that can be hoped for is:

Shoji Number 3: Hope that the Japanese continue to buy our confetti and do our work for us. unfortunately this door is made of paper and not very useful. the Japanese have tried to prop up the Dollar for 30 years and have watched the JPY appreciate from 360 in 1971 to 108 today.

relying on other nations' CBs to defend the dollar is not a viable long-term strategy. and i see no reason to believe Door Numbers 1 and 2 are of any interest to Greenspan.

and as to the old saw about the Fed only controlling short rates: Bernanke and Greenspan have explicitly reminded the markets numerous times that there is "ample precedent" for the Fed to extend its activities to all and sundry longer dates. in other words, they can monetize whatever the hell they please. taken to its logical extreme, i suppose this gets us to the "dropping dollars from helicopters" scenario, but i suspect even the CBs are scared of going that far. however, i believe in the short and medium term they can have a significant impact on just about whatever they please, in terms of market rates.
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