Scott,Interesting charts. Knowing that you believe in trend reversion, does the spike in commodities mean that we will see a reversion to the long term trend line (lower commoditiy price) or do you see commodities @ a fuller higher level than historical prices show (higher prices). In other words, bullish or bearish on commodities? Thanks.
Follow the Euro17 economic sentimentindicator when that turns Europe is back in business..
If you look at the dollar exchange rate, the Fed did everything to keep money policy bullish right up until Obama won. Then it tightened up, and we went into deeper recession, and debt repayments couldn't be made, so the global economy tanked. The Fed may be apolitical; I hope it is. Why did the dollar exchange rate harden up after Obama won? People had that little confidence in Bush jr. that Obama was a relief? If the Fed was fighting commodities inflation in 2008-9, that is like trying stop a forest fire by back-burning your own five acre farm. Commodities are global, and there are now larger players than the USA, such as China. Gold does what it wants, and signifies nothing that I can detect. The largest buyers of gold are now upper-class Chinese and Indians, for family gift-giving. Gold may have a long run at higher levels due to this---US monetary policy? I don't think it figures, when there are 3 billion Chindians buying gold. Looking at the charts, one could conclude that QE1 and QE2 drove down gold prices. I have to say, this is the weakest connection I can think of. I cannot imagine anyone connects gold to US monetary policy anymore. Regardless of the past, what is needed for the medium-term future is not only a bullish Fed, but a pro-growth ECB and Bank of Japan.He who trades economic prosperity for the perceived security of price stability will soon have neither.We are hitting ourselves in our economic heads with a hammer of tight-monet. We can stop, and embrace growth.
Scott, I get the supply/demand thing for dollars. I don't get how the fed mops up excess dollars when (if) Europe straightens out, without significant increases in rates.You also didn't mention how the massive debt plays into all this?? Is it different this time?
Jeff: that's the real question: how and whether the Fed can tighten policy sufficiently to counteract a big decline in dollar demand. It all depends on how fast the Eurozone situation calms down. Probably not overnight, probably over some extended period. With enough time, the Fed can slowly drain reserves by just not reinvesting coupons or principal repayments. It could simultaneously raise interest rates on reserves by several hundred basis points, I think, without cause any great disturbance; after all, the steep yield curve assumes they will do just that, but of course the uncertainty is over the timing and the speed of rate hikes. I don't think the size of the federal debt poses any insurmountable problems. Bear in mind that if Europe gets better, the US economy is likely to get stronger, and that will generate stronger tax receipts and slower growth in things like unemployment benefits and food stamps. Increased revenues and flattish spending could go a long way toward reducing the deficit to more normal levels, and we're already half-way there as it is (deficit % of GDP is down from a high of 10.4 to 7.4).
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