Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Analysis: The Fed's Currency Collapse Gambit


Don't worry - this won't hurt a bit.

Editor's Note: This article is by Stephanie Pomboy, of MacroMavens.

This won't hurt a bit.

That, at least, was the assurance offered by the Fed in a working paper that recently turned-up on its website. According to the authors of Currency Crashes in Industrial Countries: Much Ado About Nothing?, we're all far too uppity about the value of our currency. Indeed, the paper concludes that "crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates."

That's right - your central bank just juxtaposed the words "crash" and "good." In so doing, they've eradicated any scintilla of doubt we might have had that the Fed was willing to risk currency collapse. As I've long argued, when confronted with the Hobson's choice between allowing rates to rise or the currency to fall -- in order to lure creditors to buy more of our increasingly dubious claims -- the Fed was sure to opt for the latter. So sure, in fact, that gold began pricing in this outcome the moment Ben Bernanke put it on the table back in mid-2003.

Recognizing that rates would soon be capped and the dollar left to take the hits, gold made its unprecedented departure from bonds. (See GLD for more data.)

Click to enlarge

Though I do appreciate the Fed's bold ratification of my thesis that the dollar would be the valve for our policy sins, given the choice, I'd prefer to be wrong and maintain our dollar's purchasing power. Being short a PhD against the Fed in this battle of wits, I simply can't manage to fathom how a currency crash could prove painless - much less (to borrow another line from Shakespeare), a consummation devoutly to be wished.

Well… at least not for holders of dollar assets. For dollar debtors, however, it's a paradise. And that's where the Fed's cavalier attitude about a weaker dollar incurs great risk. By openly proclaiming its intent to cap interest rates (and let the currency pay the price), the Fed has sent out a siren call to speculators and debtors the world over to borrow at artificially low rates in a currency being steadily debauched.

Indeed, according to Bloomberg, the share of dollar bonds issued by foreigners has already climbed sharply from 20% last year to 36% last month with everyone from Turkey to the Philippines seizing the opportunity to borrow in depraved bucks.

And the dollar decline has barely begun! Wait 'til the "innocuous" crash comes, and the liquidity flowing out of the dollar valve turns into a deluge. At that point, we suspect the Fed will have a harder time selling the view that a collapse is a non-event - if not here in the US, at least in the emerging markets.

For Ben is about to do unto them precisely what he accused them of doing to us: Inflate their markets on the back of his manufactured "saving glut."
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos