Currency Update: Dancing in a Minefield

Biggish moves of late in the FX markets, as noted recently in another post

The “emergency” BOJ intervention (coordinated with private Japanese banks on Sept. 15), which briefly devalued the Yen from it’s high near $83 USD to $86 USD, has already half-collapsed to near $84.50 USD.   Clearly, the forces weakening the dollar continue to overwhelm this, initially reportedly, $4-$6 billion move.  (Update:  As of 9/30/10 Reuters reports that these intervention efforts now amount to a total of $25.37 billion.)  More intervention can be expected, given Prime Minister Naoto Kan’s recent statement: “If there is a drastic change, such intervention is unavoidable…“.   

The general (and continuing) weakness of the dollar was re-affirmed yesterday by Bernanke’s statement’s after the FOMC meeting, indicating that near-term Fed policy would be intended to “returning the path of inflation to levels “consistent with its mandate.”   That is to say, the Fed’s mandate to ensure that there is inflation.  Widely speculated, the markets appear to be interpreting this with an expectation of further Fed purchasing of US Treasuries, which is to say monetization of the debt.  (You feelin’ me yet, there, Wilbur?)

This notion, that inflation = growth is part and parcel with the equally ludicrous notion that money = wealth, one reason they keep printing more of it, meaning, really (as you follow the logic and the math), that deficit spending = growth.  Of course, as we’ve had reason to note on various occasions, all such circular thinking tends to ignore the lack of real wealth production actually occurring in the economy. 

Two days ago, you may have noted, the NBER “officially” called the end (or bottom) of the recession back in June 2009.  This call, we might remind you, is based on the sort of GNP calculations that reflect all of that additional public sector spending (and accrued debt) that is now looking something like a pretty big lump (the size of an elephant carcass or, perhaps, a big black horse) that’s been swept under our collective rug. 

And, as we illustrated in another recent post, just how “real” might we imagine the NBER’s current post-June 2009 growth estimate of 3.7% (averaging GDP and GDI, year over year) to be while we’ve been deficit spending in an amount equivalent to more than 9% of GDP (some estimates indicate nearly 12% for 2010).

I may be a bit outside the mainstream consensus here (wouldn’t be the first time), but, in my household, I generally try not to count the money I borrow as income.  Call me crazy that way.   But, I digress……let’s close this with a quick look at that elephant (or black horse) under the rug.

Gold is again hitting record dollar levels and might well exceed $1,300 today. That, for those who’ve not been watching, is roughly 37% up year-over-year.  Which ought, at least, to tell us something about how the global market perceives the value of the dollar.  Rather inexplicable, don’t you think, especially when considered in light of a current (August, YOY) CPI of only 1.1%, which is the apparent reason that the Fed’s “in a panic” over insufficient inflation.

While Paul Krugman (and Helicopter Ben) may be among the few holding out hope for a Keynesian Miracle (say it with me Brother!), as I’ve asserted all along, the call on this issue will come, ultimately, from the global capital markets.  And by that, I mean the bond vigilantes, the FX traders, the other Central Banks dotting the globe, and, finally, the commodities markets.  As capital runs from dollars and/or dollar instruments, life can be expected to get very expensive in America. 

Hyperinflation is not “inflation on steroids”.  It is a repudiation of the currency.  Best beware when you’re dancing in a minefield.

Harry Tuttle

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One response to “Currency Update: Dancing in a Minefield

  1. Pingback: Redux: Let’s Get Physical | A Reasonable Life

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