I wonder if what we're seeing is a general bureaucratic inability to think like a chess player. Consider Iraq - how many people who bothered to think of consequences stood up and said "sure, Saddam isn't a nice guy, but if you take him out, you'll create a chaotic power vacuum that we'll end up owning. He's not a present threat to us any more than any of the other crazies out there. We shouldn't step into this quagmire with American money and lives." Our "leaders" couldn't think beyond the next step, and made their decision based upon the outcome *tomorrow*, ignoring the longer term.
I think the Fed is guilty of the same thinking, and further assuming linearity of markets. Sure, we might destroy the dollar, but we're probably going into recession, and we're scared sh*tless about the specter of deflation given where asset prices and debt levels are at. And if we're too easy and the dollar weakens, we can always go back to where we were - reverse course and tighten to fix the dollar.
The flaw is in assuming linearity in the markets. It may be brilliant - it may lead to the Chinese et al dumping their dollar holdings at lower prices. However, it may also eliminate the "kindness of foreigners" that we've become so dependent upon. No more vendor financing, as it were. The market would not be linear, and you could not get back to where you were. Long-term interest rates rise despite Fed ease, and the price of mortgage financing - the very thing the Fed was hoping to help out - could actually go through the roof.
Let's see, since the Fed dropped short rates 50bp, we're up, what, 40bp on 10yr?
stockcharts.com
I would love to see heli-Ben absolutely discredited courtesy of the law of unintended consequences.
I really don't understand what they're doing, except that they are clearly trying to produce more inflation. I thought we would have learned our lesson in the 70s that it was insidious, but perhaps the fear of deflation is just too great.
Now I'm really confused, and need to take some time to consider the financial market ramifications of all this. Whither homebuilder stocks, financial stocks, tech stocks? Whither emerging markets? What about gold? Oil? Are we really going to have another huge leg to add to the incredible asset/commodity inflation of the past five years?
I struggle to believe that this can all be held together in the context of a global emerging markets bubble. To the extent that they are so dependent upon U.S. demand and continued vendor financing, it seems that this must upset the apple cart. Catch-22? They cut off the vendor financing thanks to heli-Ben's actions, their growth slows, and we repatriate all the hot money that has quintupled so many emerging market valuations?
Don't know the outcome. I just need to step back and think about this for a while. My gut says trashing the dollar means a bad environment for short-selling. Shorting means holding lots of devaluing dollars. So I'm a little lighter there. Finding it hard to believe the commodities bull extends off these levels, but perhaps that's it. Maybe this is like the early 70s, when the Fed made the first blunders that led to the rapid increases in inflation that followed. They kept trying to pump liquidity, but inflation kept getting progressively worse until the Fed finally got religion and administered the badly needed medicine.
Hope it doesn't come to that, and somehow I think it is inconsistent with the global credit bubble, but I'm certainly giving it much greater likelihood than before the Fed's dereliction of duty.
BC |
