Wednesday, 27 May 2009

Public sector largesse - the Fed has a lot to p(l)ay for

In an article which echoes my recent comments on the nature of the double bind facing the Fed, Dr. Stephen Leeb talks of the Vicious Circle of a Falling Dollar .
If foreign investors are moving away from the dollar and into commodities, they will give the U.S. economy one additional obstacle in its struggle towards recovery. Not only must we contend with deleveraging from the consumer side, in the form of banks still refusing to lend, but now we face higher interest rates, which will affect mortgages, and higher energy prices, which restrain economic activity.

However, there is a risk. If the Fed finds it must ramp up its bond purchases, it will lead to more dollars being pumped into the financial system. That, in turn, will give investors even more reason to sell them. The result would be a vicious circle.
I agree with the author that there is a "vicious circle" at work and in fact I see it even more grimly in the form of a double-bind which can lead to a pathological condition. But this won't stop those traders, who have figured out the nature of the bind, gyrating the market in a desperate battle of wits with the Fed who will be attempting to prove, with a lot to play for, that they are wrong.

Business as usual? Not likely given the magnitude of public sector largesse .

Eventually, and it could take a while, this will be an extreme hazard zone and the wearing of crash helmets is strongly advised.

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