Macro Tsimmis

intelligently hedged investment

SELL UltraShort Finance ETF (SKF)

Posted by intelledgement on Thu, 20 Mar 08

OK, we can’t fight the Fed here. Not when they have the world’s central banks helping support the dollar. The banks are borrowing 2% money from the Fed whether or not their balance sheets are strong enough to get it elsewhere and loaning it out for 6% mortgages. That covers a lot of sinful bad paper, and most of them should survive, assuming the Fed does not run out of money. (LOL j/k…whatever does us in here, it won’t be the Fed running out of money…they don’t even need to print more nowadays; they can just create it electronically.) The key to keeping the lid on here, however, is the support the other central banks are lending the dollar, thus allowing the Fed to keep loosening money to save the banks without breaking the currency. Why? Because partly because those central banks already have tons of dollars and they are loathe to see them zeroed out but mostly because the world still needs the USA consumer to be spending here, and for as long as possible. If the yuan and the yen and the euro get too expensive relative to the dollar, even that spendthrift growth engine for the rest of the world’s economy shuts down. Hardly anyone outside the USA—and apparently no one here aside from Ron Paul—wants to see that happen until the last dime has been milked.

We think this will work to prop up the banks and keep the system afloat for a while longer. We know this Rube Goldberg solution is doomed to fall apart in the fullness of time, however, and we fully expect to be back here. The key indicator to watch now is the dollar. With the thrust of the central banks behind it, the dollar is defying gravity today: increasing in value despite lower interest rates on treasuries and printing presses run amok at the Fed. That cannot last forever, and this is the last card in the bankers’ hands. It may be months away—after the election would be a good time to check back—but when the dollar starts to fall again, it’ll be katie-bar-the-door.

In the meantime, every additional greenback the Fed issues and every day that passes with diseconomically low interest rates, the weaker the dollar—and our economy—becomes…the harder will be our eventual fall…and the longer it will take us to recover.

As possum said, “We have met the enemy and he is us.”

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