Tuesday, October 19, 2010

You Can't Have Your Cake And Eat It Too.

"Maybe the Fed can fool some of the people some of the time, but it can’t fool all of the people all of the time. In the process, policy makers may end up fooling themselves that they can create expectations of a little more inflation without delivering a lot of the real thing."
-Caroline Baum

In a speech at a Boston Fed conference last Friday, Bumbling Ben Bernanke made every effort to convince those in attendance that he could control inflation just by moving his lips. Yes, moving his lips. Seriously.

In his speech Bernanke spoke of "inflation expectations", suggesting that by containing "expectations" the fed has kept inflation "under control":

The public's expectations for inflation also importantly influence inflation dynamics. Indicators of longer-term inflation expectations have generally been stable in the wake of the financial crisis. For example, in the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters, the median projection for the annual average inflation rate for personal consumption expenditures over the next 10 years has remained close to 2 percent. Surveys of households likewise show that longer-term inflation expectations have been relatively stable. In the financial markets, measures of inflation compensation at longer horizons (computed from the spread between yields on nominal and inflation-indexed Treasury securities) have moved down, on net, this year but remain within their historical ranges. With long-run inflation expectations stable and with substantial resource slack continuing to restrain cost pressures, it seems likely that inflation trends will remain subdued for some time.

Bernanke then concluded later in his speech that through "communication" he believed the fed could not only further lower interest rates, but keep a lid on inflation just the same:

Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC's anticipation that exceptionally low levels of the federal funds rate are likely to be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC's statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.

Full-Text: Ben Bernanke's speech at Federal Reserve Bank of Boston, Oct. 15, 2010

What is this guy smoking? He clearly recognizes that expectations for QE2 have accelerated. He comes out and attempts to back pedal those expectations because it's obvious that the effects of these expectations and the actual move to QE2 will have, and is having, severe negative consequences for the US Dollar. Bernanke hopes that by opening his mouth he can slow the descent of the Dollar.

You can't have your cake and eat it to.

Yesterday afternoon, Bumbling Ben's partner in crime, Timmy [Pinocchio] Geithner proclaimed, once again, that the US fully supports a "strong Dollar policy". In the context of Bernanke's plans to inflate the money supply, this comment by our tax cheat treasury secretary seemed a bit disingenuous. In the context of his cries for an upwards revaluation of the Chinese Yuan, this comment sounded utterly ridiculous.

Geithner: U.S. will not engage in dollar devaluation
"It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive," Geithner added. "It is not a viable, feasible strategy and we will not engage in it."

Geithner broke his silence on the dollar's slide in recent weeks as the Federal Reserve considers more monetary easing. In response to audience questions from the Commonwealth Club of California, he said the United States needed to "work hard to preserve confidence in the strong dollar."

Asked if the dollar would lose its status as the world's reserve currency, the Treasury chief said, "not in our lifetime."

The U.S. Treasury chief also reiterated his views that he believes China will continue to lift the value of its yuan currency to aid the rebalancing of its economy away from exports and toward domestic growth.

Asked how much higher China should allow the yuan to rise, Geithner said: "Higher."

"You can't know how far it should go. What you know now is that it's significantly undervalued which I think they acknowledge and it's better for them and of course very important for us that it move. And I think it's going to continue to move," Geithner said.

Timmy, you stupid !#*&%! On Friday your Fed chairman said that "all things being equal, there appeared to be a case for further debasing of the Dollar. How do the Fed's intentions support a strong Dollar. And excuse me Timmy, for pointing out that demanding China revalue their currency higher is grossly negative for the US Dollar. A rising Yuan will severely impact the value of the US Dollar, and likely lead to the bubble in the treasury markets bursting. Of course that possibility is why the Fed has announced that they will be buying treasuries...somebody has to buy all the treasuries the Chinese will be selling [or NOT buying]. If the Chinese are going to raise the Yuan, they will have to stop selling Yuan and buying Dollars to purchase US Treasuries.

Tim Geithner, you are absolutely, 100%, full of sh*t when you tout a "strong Dollar".

Bernanke: Fed wrestles with size of aid program
Jeannine Aversa
WASHINGTON (AP) -- The Federal Reserve is prepared to take further steps to rejuvenate the economy by buying Treasury bonds but is wrestling with how big the program should be, Chairman Ben Bernanke said Friday.

Bernanke also indicated that Fed policymakers are trying to craft a plan to lift inflation from super-low levels. He made his remarks in a speech at a Fed conference in Boston.

Bernanke said the Fed must both weigh the risks of a Treasury-buying program and determine how the debt purchases should be paced. The Fed's bond purchases would be intended to lower long-term interest rates to stimulate buying and spending and help lower unemployment.

Those Treasury purchases would inject many more dollars into the financial system. And that poses a longer-term risk: High inflation.


This notion that Bernanke is unsure of "how big" his QE2 should be is pure poppycock. The headline, and Bernanke's ambivalence through out his speech Friday, are nothing more than smoke intended to slow the fall of the Dollar and the rise of Precious Metals and commodities.

This mornings "air-pocket" in the Precious Metals can be attributed to this Bernanke blah-blah. Likely currency interventions behind the scenes to "support" the Dollar also contributed to some profit taking in the Precious Metals and those short the Dollar.

Of note is the Central Bank of Brazil's meeting today and tomorrow. Particularly in light of their announcement to skip this weeks G20 finance ministers meeting because of "currency issues". This is noteworthy as Brazil is one of the four BRIC nations [Brasil, Russia, India, China] seeking reform of the world's reserve currency.

Brazil's Mantega will not attend G20 due to FX issues
BRASILIA, Oct 18 (Reuters) - Brazil's top economic officials will not be attending meetings of Group of 20 finance ministers and central bank governors in South Korea this week, the finance ministry and central bank press offices said on Monday.

Finance Minister Guido Mantega canceled his trip because of currency issues, the press office confirmed, adding that he had just come back from an international trip and would be accompanying President Luiz Inacio Lula da Silva to the Group of 20 leaders meeting next month.

Reuters reported on Friday that Mantega would not be attending the meeting and would unveil new currency measures aimed at containing a rapid rise in the real BRBY this week.

Central Bank President Henrique Meirelles will also not be attending the G20 this week because the bank holds its monetary policy meeting on Tuesday and Wednesday, the press office of the central bank said.

These air-pockets in the Precious Metals are much easier to stomach when they are expected, are they not? They also make for excellent buying opportunities.

Step up to the plate when these opportunities present themselves. Bernanke and Geithner can blather all they want, the fact is the US must have a lower Dollar if they are to prevent an outright default on their treasury debt.

China is acutely aware of this fact, and has not been shy about calling the US on the carpet in this regard:

U.S. is currency war's "tomb maker" -China economist
Oct 14 (Reuters) - The United States fired the first shot in the currency war and the rest of the world must be on guard for its deliberate strategy to devalue the dollar, a Chinese economist said in an official newspaper on Thursday.

In a front-page commentary in the overseas edition of the People's Daily, Li Xiangyang described the United States as the conflict's "first maker of tomb figures", a Chinese idiom that means someone who creates a bad precedent.

Li, head of the Asia department at the Chinese Academy of Social Sciences, a top government think tank, said continued intervention in currency markets by developed economies would deal a blow to global economic recovery.

Chinese leaders have warned before that loose monetary policies in the United States pose a serious challenge for emerging markets, but rarely in such strident language, a window onto the rising anger in Beijing.

"The dollar's depreciation may appear to be market-driven. In reality, it is a depreciation coloured by very strong, deliberate actions," Li said in the paper, which serves as the chief mouthpiece of China's ruling Communist Party.


China: US has “Clearly a Double Standard” on Exchange Rates
By Rocky Vega, for The Daily Reckoning
10/19/10 Stockholm, Sweden – It sounds hard to believe, but apparently China has detected a US “double standard,” whereby the US is demanding China strengthen its renminbi currency while itself intentionally weakening the dollar through money printing. These days, China is almost getting a little too good at calling it like it sees it.

According to the AFP:

“The criticism of US monetary policy and its weakening dollar comes as Washington maintains pressure on Beijing over its yuan exchange rate, which US lawmakers claim is grossly undervalued and causing global trade imbalances.

“US policies of ‘printing money’ and holding interest rates near zero were the main cause of the currency dispute, said a commentary by the Xinhua news agency, carried Monday in the central bank-backed Financial News. ‘In the eyes of some American politicians it is entirely reasonable to print money and keep the dollar exchange rate low, but it is illegal for other countries to protect their economic and financial security by pushing down exchange rates,’ it said.

“‘This is clearly a double standard.’”

OK, granted, it sounds a bit like a double standard. However, at least the US is standing firm in its stance, as opposed to equivocating on the position.

“For the second time this year, the Treasury Department is withholding a semiannual report that labels other countries as ‘currency manipulators.’ The report was due Friday, but with the midterm elections coming up, and a G-20 summit a few days after that and the Treasury sec’y only now recovering from the tantrum he threw last week, they decided to punt.

“‘Had we named China as a currency manipulator,’ one Treasury official anonymously explained it to the Swoop, a foreign policy insider website, ‘we would have angered the Chinese; had we not done so, we would have angered American voters. Other than delay, it was a no-win.’”

Double standards and something akin to a spaghetti spine on the whole currency manipulation matter. These are not sounding like the best of days. You can read more details in the AFP’s coverage of how, according to China, the US has ‘double standards’ in the ongoing currency dispute.

Do you really think the Fed can stop the fall of the US Dollar?


China surprises with first rate rise since 2007- Reuters

BEIJING (Reuters) - China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects concern about resurgent asset prices and could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

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