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How The Fed Has Backed Itself Into A Corner
Submitted by Leonard Brecken via OilPrice.com,
In my last article I outlined the case that the fall in commodities is a result of Fed policy more so than fundamentals. The fall in oil began, almost to the day, when the dollar began its rise last June and remained perfectly inversely correlated for rest of 2014 into part of 2015. In 2015, the dollar began to weaken as the U.S. economic growth myth got exposed and yet oil, instead of rising, fell further. The Iran deal helped, as well as OPEC continuing to pump oil above quota levels.
Admittedly, U.S. oil inventories remain above historical levels, a trend that accelerated in the second half of last year, further fueling the decline in oil. To some extent, that oversupply was enabled by the Federal Reserve’s easy money via rising leverage, as speculation in futures markets drove oil prices up. However, the initial spark was probably tied to a change in the Federal Reserve policy of propping asset prices via Quantitative Easing (QE) vs. what’s going on now in threatening to raise rates.
Coincidence?
With Congress reaching a debt ceiling/budget deal, we learned more about how and why this occurred. Instead of more QE, it appears the government is opting for more fiscal stimulus in 2016 as the “deal” basically gives the White House unlimited spending thanks to a relaxed debt ceiling. Coincidence right? Of course not.
Now it’s becoming clearer as to why this option was taken once again: allow the government to distort asset prices through intervention.
The Yuan Threat
As has been reported in the media, the IMF is likely to include the Yuan in its basket of currencies, basically opening the door to the Yuan becoming a reserve currency. This is occurring at the same time the petrodollar is being sold, as commodity oriented nations such as Saudi Arabia are selling wealth funds (i.e. U.S. dollars) to fill their budget gaps.
Since this adds to downward pressure on the U.S. dollar, it’s no wonder the Federal Reserve has changed course. For one, a strong U.S. Dollar depresses commodities coming into an election year, boosting consumers in lower income brackets. The second motivation for a strong dollar is to ward off the threat of the Yuan replacing the Dollar as the reserve currency.
Impending U.S Dollar Weakness
The news that the Chinese government is considering relaxing capital controls and thus allowing the Yuan to appreciate, is a sign that they think the IMF inclusion of the Yuan is imminent. The displacement of the Petrodollar, even fractionally, will result in a drop in the U.S. Dollar. Thus, with this threat, if the Federal Reserve undertakes another round of QE it will further stoke U.S. Dollar weakness.
That would reverse the commodity declines that began last summer, wreaking havoc on the standard of living especially for the lower income electorate the government depends on for votes, come 2016. So the Fed is weighing the negative consequences of a strong dollar on corporate profits vs. unleashing inflation on the electorate, pressuring long term interest rates. We now see which negative scenario they favor and why.
This should further explain the influences on oil prices and clearly show that fundamentals aren’t the only thing at play on setting prices.
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The only way that this becomes a problem for the Fed is if Americans get pissed off enough to "wake up", and take the issuance of their currency back from the Fed and it's foreign masters.
Forget it. Mercans are comatose.
Unfortunately, the fact that you're even aware of the issue puts you in a very small minority of Americans who know about it, let alone care.
They care about their current dillema of raising kids in the US public school system, fighting with the in-laws on who gets to pay for grandma's assisted living home, paying back school loans, paying back car loans, paying back the credit card statements that seem to increase each month even though they are sure they don't charge that much on them.
Did the fed back itself into a corner, or did the free market, all on its own, corner the money changers?
Frankly, I'd believe the latter more than the former. If incentives are artificial, there's always a comeuppance.
Thats also why I think there is a push behind Shitcoin, because Uncle Sham got a problem with gold against these guys (China, Russia, India) that I dont think we know the extent of yet? Just a hunch, but watch their actions. Someone is really trying to show shitcoin as a "good" alternative to gold. http://www.marketwatch.com/story/is-bitcoin-a-better-investment-than-gold-2015-11-02
In case your not sure Im not a big fan of Shitcoin. Its another important step in their quest for cashless / digital / controlled / mindless society. Agitate Up.
Next healthcare premiums increase and put people in the poorhouse. Oh, that's already in progress.
Cowardice
This article makes sense. However, health-care expenses are skyrocketing, house prices are near another bubble top, and college tuition is through the roof.
Therefore, overall, I can't see how any benefit in purchasing power from a stronger dollar will come close to offsetting these other bubbles.
Which means, the middle-class and below remain totally screwed.
Agreed. But include super-rising property taxes.
Well, no disrespect to the author of this article, but it's really not much of a revelation that a strong US dollar (versus other currencies) hurts US exports by making them expensive and helps consumers by making foreign imports cheaper! That's a simple truism. (I don't live in the USA, but my home of the Cayman Islands is equally affected, since our local coupon-currency is rigidly tied to the USD.)
I believe the strength or weakness of the USD is a purely political choice. Since every other major currency is bouncing around in the same way as the USD, the actions of the Federal Reserve have only a limited effect. The present dilemma is not entirely the Fed's fault, for once.
http://barlowscayman.blogspot.com/2014/02/might-us-dollar-collapse.html
But, the other currencies aren't bouncing around like the dollar. The yen was very deliberately devalued post-2011 and now underpins trillions via the yen carry trade. The fact that it leveled out last December is responsible for equities topping out.
You could make the same argument about the euro, but the ECB telegraphed it for so long that it was front-run like crazy. EURUSD is now trading with pennies of where it was when PSPP was announced in March.
http://pebblewriter.com/the-yen-carry-trade-explained/
The Fed has been trying to get DC to reduce taxes. Instead DC has went the other way. Monetary policy (Fed) has went about as far as it can go without causing collapse. The only fiscal policy DC wants to implement is cronyism. The budget deal. Handing out money to people for blow and hookers. When the food doesn't make it to where the EBT cards are is when things get interesting. Estimates for when that happens has to be top-secret.
(double-post; sorry!)
Let's use Occam's razor here. Oil prices dropped last year because the Saudi monarchy decided to use its price leadership to undermine Russia, Iran and the US. At 97 on the index, the US dollar is at its highest level in many years, because of emerging market capital flight. There is no need to develop contorted arguments to make it appear, once again, that it is all the fault of the Fed.
Would agree with you except for the fact that the dollar's strength is, in large part, a result of the focus on deliberately devaluing the yen and euro in support of the carry trade.
http://pebblewriter.com/the-yen-carry-trade-explained/
Agree your point on the euro and yen. But the long-term goal of Japan and Europe is to increase exports and employment. It is the 30's all over again.
It's exactly the same position BoJ is in, just the flip side. Protect exporters' profits through further yen devaluation (dollar strengthening) or protect consumer buying power by keeping energy and fresh food affordable (dollar devaluation.) Of course, it's more complicated than that.
Japanese exporters have to import raw materials and also use a lot of oil. And, the consumers rely on having jobs to be able to afford consumption. In the end, the whole stinking heap takes a back seat to stock values, which are now almost 15% of GDP (BoJ and GPIF.)
In that regard, the US has an advantage. The Fed and Social Security don't own stocks directly. Of course, the Fed's "owners" do. So, it produces the same dilemna as the Japanese face: no way out. In the end, our importing expenses matter more than our exporting revenue. I imagine that will keep the dollar relatively strong -- especially as the ECB and BOJ continue to race to the bottom.
http://pebblewriter.com/japans-equity-trap/
The moral hazard is thus proven to be an economic hazard, because it really was all the time, a political hazard.
Long pitchforks, tar, feathers, hanging rope, backpacks, Sterno, hotdogs, canned beans, 22LR, and sardines.
Short ObamaCare, Carbon Credits, PC, Democrat politicians, George Soros, Warren Buffett, Bill Gates, small, red portraits of Mao.
lol. I can feel your seething distrust through my monitor.
Corps are building abroad and selling to US, essentially "exporting in". Why would they hurt from the strong dollar. Especially considering the free shit subsidized by .gov.
I mean this is an embarassing question...is that Janet Yellin sitting in the corner of the picture?