Ve haf vays of making you consume! That appears to be the insidious plot of Bernanke and his Fed pals as once again the misguided belief that government can control the economy is seen as logical. How do they plan to do this? Through inflation, that’s how.
At next week’s FOMC meeting it is all but a foregone conclusion that we will get some form of QE2; but the question remains—how much? Our pals at Government, er Goldman Sachs, say that it could be as high as $4 TRILLION. That’s trillion with a ‘T’. However, no one in their right mind is expecting that much. Right now the consensus seems to be somewhere in the neighborhood of “only” $500 Billion. Phew, for a second there I was concerned.
Forget the fact that the summer driving season is over and gasoline just went up $.15/gallon. Don’t worry that the physical commodities like grain, corn and beans are rising and that some are predicting that food costs could rise by 20% or more. And who cares if developing countries around the globe are seeing rampant inflation. We MUST avoid deflation at all costs!
And why is inflation the desired scenario? Because it will cause you to consume today, for fear that prices may rise even further in the future and the value of your dollar may be lower. Voila! The consumer is back! Not because you want to be, it’s because you HAVE to be.
Next, as more people can’t afford their rent, it becomes more cost effective to buy houses. Voila! The housing market is back! Instant demand. Problem solved. Now the banks can rest easy as they can unload their ever-increasing inventory of foreclosures and can go back to paying themselves enormous bonuses once again.
And the final piece to the puzzle is that “they” get to strip out food and energy costs from the inflation data (who needs those anyway), thereby showing that indeed there is no inflation as more and more of the unemployed have to go on the public dole to afford food. And even some of the underemployed! Wow, I’d hate to see what this looks like if there actually was inflation.
As a side benefit, the government gets to pay back its IOUs in WORTH LESS dollars (note the space), so no problem there.
So today the Dollar is higher as the market is breathing a sigh of relief that QE2 won’t be at the high end of the range. In addition to this great news, lower CPI figures in Australia confirm that indeed there is no global inflation so it’s “game on” for Ben and the Fed.
In the forex market:
Aussie (AUD): The Aussie is lower across the board as CPI data came in slightly lower than expected at 2.8% vs. an expectation of 2.9% giving the RBA a potential reason to pause on interest rate hikes at the next meeting. It looks like the double top I identified yesterday held. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is lower as Dollar strength has induced some risk aversion, ahead of tonight’s RBNZ rate policy meeting. While the expectation is that there will be no rate hike, it looks like some Aussie money flows are making its way to the Kiwi.
Loonie (CAD): Guess who wants to get into the currency manipulation game? You guessed it! It’s Canada, as BOC chief Carney said that Canada could “conduct transactions” if the Loonie exchange rate poses a risk to the economy.
Euro (EUR): The Euro is mixed as its anti-Dollar status is pushing it lower despite better than expected French consumer spending (riots be damned) and Italian business confidence figures. However, European stocks are lower as earnings have missed targets.
Pound (GBP): The Pound is holding up surprisingly well after yesterday’s GDP report. The pressure is off of the BOE for now, as the market turns its attention to Bernanke and the Dollar.
Dollar (USD): The Dollar is stronger for the second day in a row as the consensus of the size of QE2 is becoming more palatable to the market. This is most definitely a case of “it could be a lot worse”. Durable goods orders came in better than expected, though durables ex transportation missed the mark.
Yen (JPY): The Yen is showing strength this morning (but lower against USD) as lower stocks and commodities are dampening the demand for risk assets. So no BOJ intervention, for now. (Click chart to enlarge)
Well, it’s a good thing we had that G-20 meeting last weekend. Imagine what would happen without it! It is obvious that the Bernanke playbook is causing bad behavior around the globe and were it not for all of the over-the-top promises of QE2, I wonder if we would get it at all.
At this point NOT doing QE2 would bring about major credibility questions to a Fed that already lacks credibility. So my guess is that that despite the obvious ramifications of the “playbook” as I laid out above, I still have hope that greater sensibilities will prevail and that we see even less than is currently expected.
So maybe I should be thankful to the Fed that I have now become an optimist. By making the situation seem so dire and undesirable; I have no other choice but to believe.
Nah, I’ll think I’ll stick to my guns. Provided the powers that be haven’t found a way to remove my proverbial ones—yet!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
Tags: account, AUD, Aussie, blog, cad, course, currenc, currency, currency trading, dollar, economy, EUR, forex, forextrading, free, fx, fxedu, gbp, Il, interest, jpy, market, Mike Conlon, news, nzd, practice, ssi, time, USD, Yen