The US dollar weakened further today against a basket of global currencies on speculation that the US government will pump out more rounds of QE in the weeks ahead as the global economy continues to falter. The US dollar appears deeply oversold. Although it may fall further, a counter-trend rally is likely when so little predicted. Meanwhile stocks and commodities appear precariously over-bought.
The G-20 talks ended with a loose statement of unity from members to not devolve into currency devaluation wars. But that was just talk as each country intensifies desperate efforts to revive consumption in the midst of a secular global contraction in demand. It's every country for itself. As the US dollar weakens the crisis for the world’s export nations grows worse as demand weakens everywhere. If only QE 2, 3, or 4 were likely to revive demand for goods and services. Businesses don’t need loans they need customers. Consumers don’t need more credit they need more employment. QE throws more debt at debt with no lasting benefit. As John Hussman writes today:
“…monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short term interest rates. Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.
…the governors of the Fed are creating massive distortions in the financial markets with little hope of improving real economic growth or employment. There is no question that the Fed has the ability to affect the supply of base money, and can affect the level of long-term interest rates given a sufficient volume of intervention. The real issue is that neither of these factors is currently imposing a binding constraint on economic growth, so there is no benefit in relaxing them further. The Fed is pushing on a string.”
See: Bernanke Leaps into a Liquidity Trap for more.
For parallels between Fed policy today and similar policies that extenuated the Great Depression see Depression within a depression.
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