I don't think anyone still believes that the US thinks a strong dollar is in it's best interest. The dollar has very little going for it these days in that there will be trillion dollar deficits for years to come, the Fed is buying treasuries and keeping rates at zero in an effort to spur lending which anecdotally speaking appears to not be happening (there is also data to support the idea of very little lending).
There are dollar bulls out there but as best as I can tell the arguments here seem to focus on counter trend activity which even if correct is not a story about dollar health.
One interesting point made in the article was that the current zero rate environment hurts savers, referred to in the article as the prudent, while rewarding the scofflaws (the article didn't use that word, I just think it's funny). While I am not sure what priority prudent savers should be on the Fed's list the idea of encouraging risk taking is not good insomuch as some people should not take risk or more practically speaking what ever amount of money you have that should not be exposed to risk should not be exposed to risk. Zero percent potentially encourages people to make bad decisions chasing yield with money that should remain riskless.A point I have made repeatedly is that if you are getting 4% in a 0% world you are taking risk--hopefully you understand what that risk is.
Can we all agree that in getting to this point the Fed, the Bush administration and the Obama administration all took (or are now taking) extreme action, perhaps the most extreme action ever taken (I concede most extreme ever could be open to debate)? Based on how certain types of human frailties tend to repeat over and over it is reasonable to question whether the correct action can be taken at the correct time to prevent the sorts of things that the Schiffians are worried about (hyperinflation and a worthless greenback) from happening.
Without turning this into a political debate my sense is that Obama somehow does not understand the potential consequences of extreme action. I don't think he understands, I mean really understands, that in general there are economic consequences for policy decisions. Nor do I think he understands, I mean really understands, the potential consequences of the actions taken to date during the current event. Were the Obama administration to talk more about potential consequences in detail they would instill confidence, some anyway, that they understand, I mean really understand, the potential and how to mitigate a series of negative consequences.
A huge part of the problem here is that political cycle and the priority of reelection above all else works against finding the best solution. Pretend for a minute that they can figure out a plan of short term pain to create a long term fix, what Senator due for reelection in 2010 will vote for something that causes short term pain? With that line of thinking what member of the House would ever vote for the tough choice?
A rather brutal analogy; In 1982 I was diagnosed with a rare but treatable form of cancer. I was told that it was very unlikely that I would die from this but I was going to be in for a bad 48 weeks. So the trade off was a bad short run for a healthy (knock on wood) long run. As a country we lack the political will for a bad 48 weeks (more likely a couple of years or so).
One line of thinking that has been mentioned elsewhere that I buy into is that the Fed needs, in the short run, to pick between the dollar and the stock market. Thus far it has chosen the stock market which creates the appearance of health but is not true long term health. Long term health would come by choosing the dollar instead which means rates would go up, there would be less or no monetization and so a big drag on stocks for a while as everything but the equity market moved toward real health. Perhaps this line of thinking is right or maybe it is wrong but for now it is certainly easier to just own more foreign stocks than you used to.
As for the picture of Bryce Canyon again; get used to it for a while. After we made the video I posted yesterday we learned that there is a short hike through the hoodoos that was also awesome. It was a 1.3 mile loop that goes down one way and up coming back up. Maybe we're the last to know about this place but it was truly spectacular.
20 comments:
The question is not does Obama understand.
Does Obama care? I mean really care about the consequences. Of course he does not. You do not save high paid union auto worker jobs at enormous expense while many Americans are squeaking out a living in other areas. He only cares about the consequences to his backers.
While there will be consequences, I think it's incorrect to mix Fed policy with politics. The Fed did what needed to be done. Their cohorts worldwide did the same. Was there any choice, really? It has nothing to do with Obama. Bush, whose administration was at the helm incidently when this all started, would be in the same boat.
Wow first post and we are already Obama bashing. I had hoped we could at least make 8-10 posts before we got to that point.
I'm not sure if any president, repub or dem, can know about the consequences of their actions. Even the experts that spend 100% of their time in finances don't seem to do a good job and they don't have to split their time with other concerns national and foreign.
I do agree that unfortunately the short term gain in votes outweighs long term health of the nation. One other thing to keep in mind is that the politicians will have their wealth for retirement and comfortable living and don't have a self interest in fixing much of anything.
"He only cares about the consequences to his backers." And that would be the left-wing, liberal, commie-socialist with neo-fascist tendencies faction? Glad we kept this discussion "non-political."
It is not possible to discuss this topic in a non-political manner. How many times have Obama and the other Dem's blamed George Bush for the present mess (and this is at least partially true); ignoring the long-term costs of their favorite social program, affirmative action (in my opinion, the cause of the housing market meltdown, which in turn caused the crash)? Add to this the fact that the Fed Chairman (Bernanke) has to be re-confirmed by the Senate next year, so he becomes at least more political than he might otherwise be.
Adherents of the financial sector such as Summers and Geithner are clearly not giving Obama good advice but the political climate is probably the biggest obstacle: It's corrupted by election financing and poisonous with partisanship that mass media eggs on to increase its own revenue and market share.
The press was once viewed as the Fourth Estate, a bulwark of democracy, but now corporate media mixes news with entertainment and marketing to the point no one can be entirely sure which is which. The mishmash of sensationalized half-truths and bullshit delivered by semi-pretty people would make anyones head spin: Witness the comment above by someone who clearly believes "high paying" union jobs are the problem when in fact they are being lost to off-shoring as fast as all the rest of Main Street or the other comment by someone who has clearly bought the CRA-did-it story hook line and sinker and believes poor, colored folk brought down the most powerful nation on the planet by getting loans or promotions that should have been given to someone more deserving.
All this while tens of billion$ in bonuses are given out at banks who are making a better living by trading with 0% money on the taxpayer dime than by originating loans. What we have now is socialism for the rich (AKA plutonomy), capitalism and risk for the rest of us and the house takes its cut no matter what: It's not just government that could use some cleaning up and downsizing, the financial sector is out of control and now that it has both explicit and implicit government guarantees it can make bets bigger and riskier than ever before.
Did I mention yet we've got another bubble growing as a result? There are risks an individual can control and there risks an individual can only avoid or deflect at best; be on your guard. JMO
@Anonymous - Mixing Fed policy with politics has been going on, at a minimum, since Easy Al! To believe otherwise is foolish or naive or both.
The nugget in this post is Roger's observation of the decision to support the equity markets OR support the greenback. As my momma always told me, politics is what politics does. Look out below...
The analogy that sticks in my mind is that the stock market is like the air-speed dial in a plane. If your engines stall and your passengers only care about air-speed - well there is one sure way to get the air-speed up: point the nose down. Then all you have to do is use the intercom to belittle any passengers and crew that are worried about the consequences as toothless "crashers" ;->
In fairness I don't think that Obama or most of congress can think in terms of feedback systems. Great numbers of people think in simplistic terms such as 'if the government raises taxes then it will have more money to spend'. If anyone brings up pesky data showing that this is only true under certain circumstances then their brains just shut off.
I think this is a pretty important point: large chunks of our leadership operate on the hypothesis that our economy is a linear system with no feedback loops. In reality we exist in a highly non-linear environment with both positive and negative feedback loops.
Part of our country thinks that the Fed can make the country safer through the use of monetary policy. But another part of our country thinks that the Fed is destroying our country through monetary policy. There is really no reason to be afraid of sound money. Here is an interesting plot from the early Greenspan years when he had us on a virtual gold standard: http://www.goldworld.com/images/20060825_greenspan.gif
Notice that the decade we were on the gold standard was very successful economically. During this period period gold trended down in price, which in large part meant that people were comfortable owning dollars.
Second to last point: currency collapse is bad but it is not the end of the world or necessarily an apocalyptic event. Yes currency would be worthless in an apocalypse, but currency collapse or re-jigger all the time without an apocalypse. Think of the USSR, Russia, Iceland, Germany, Germany, Thailand, Japan, Latvia (hopefully not yet), Africa and South American countries... Economic or currency collapse CAN happen, and life goes on. I think some people have such a primordial fear that something like this could happen in the US that they refuse to think about it at all.
Last point: the real critical problem with the economy is that the government gives money away for below market rates. As Roger pointed out this just serves to boost risk and nothing else. It should be illegal to lend money at special rates to certain bankers. If this major problem went away then we would have a much less risky economic system.
Our host's comment today pretty well nails it.
Thing is, most presidents don't have much of an economics background. Some have a law background, one was an actor, one a nuclear engineer/submarine captain. etc. Even stints as governors doesn't mean they picked up much economics knowledge. So, the current president delegated the heavy lifting to the Sec./Treasury and the Fed, which seems to have gotten dangerously close to the White House.
Perhaps what's needed is a Volcker at the Fed. A guy who will serve as the heavy while the White House says, hey, it's not us. It's that independent Fed forcing the pain on you. Then again, maybe it's too late for that.
The market has indeed had a fine run. But now, it seems time to consider what do prudent investors do?
BillM
Anon 6:39. I agree that discussion of this topic is impossible without political substance. I would love to talk and read posts about how politics plays a role in the markets and most importantly, how we can make adjustments to our investing if need be. Thankfully it looks like we are back on track with the newer posts of which I am thankful for.
Posts in the tone of Obama is the devil and wants to eat our babies are not one of those posts.
Adding to Matthew's point, one way to dampen positive feedback so it doesn't reach the kind of levels that can damage a system -- "positive" here meaning self-reinforcing or amplifying, not intrinsically 'good' (or 'bad' for that matter) -- is to introduce resistance, a barrier of some kind.
Just the kind of resistance in fact that the Financial Services Modernization Act of 1999 removed when it weakened (ultimately repealed) the Glass-Steagall Act allowing commercial/lending banks to also become investment banks and broker-dealers on their own account as well as closely affiliate or even merge with insurance companies and other financial service providers: Cheap money, government insurance and no barriers to cross-holdings or trade; what could go wrong, eh?
We did get a more efficient system though: It can blow things up faster than ever before.
This whole thing leaves me playing the same game. Keeping my non-immediate savings in cash gets me nothing. So I choose bonds or a Swedroe-type thing (short term treasuries plus a little of something risky). but your left with the usual question of "well crap are we at a top?".
I've always been good at buying near the top and now I'm a bit paranoid. Heh.
Amen, Stephen. My situation exactly.
SD and Anon 9:13
Cash isn't trash. Cash is future successful investments.
Loss of capital. Now that's trash.
Yeah, yeah, there's more to it than that. The point is, one shouldn't feel the need to be 'fully invested' just for the sake of, umm, being fully invested.
If you find good opportunities, go for 'em. If you don't, well, wait until you do.
BillM
"zero rate environment"
I still think my bit about 5% government bonds ONLY available for retirement accounts is a good idea
What would begin to show Obama understands consequences would be for him to form a committee of 5 Democrats and 5 Republicans to provide a workable list of how the debt can begin to be dealt with.
let me join the fracas
why does it always appear that it must either be the "average worker bee" vs "the business model" in this country. Perhaps our entire system is out of whack and we need a new form of capitalism.
From what I understand, hedge funds dominate the market and of these, very few are interested in "long-term" holdings. So where does the average person fit in this scenario?
Hedge funds and large banks dominate the number of trades executed. Hedge fund total AUM is estimated at $1.5 T according to the first google hit. The world stock market is around $50 T for comparison.
How does the average person fit in with hedge funds? I can't resist that question ;0 The average person jumps late into a long position after the hedge funds are already shorting it. Other hedge funds front run the average person's brokerage as it is filling that block of orders.
After a correction the value and long/short funds buy the shares the average person is panic selling. If some how Average Person accumulates enough capital to invest in a hedge fund then the fund will collect 2 and 20 of their money until it implodes and takes it all ;->
Good posting for the comment board.
I agree with your take on the status of the US$ - and on the will not to take the medicine and do something about "it".
I have three children serving as military officers - and two others by our children's marriage. If they were in Afghanistan or ANY area ofpotential military conflict which required effective Presidential expertise, I would be much more worried about foreign affairs, not the dollar.
The dollar may, in the final analysis, be the least of our problems.
T
Lets all bash Obama for causing all our problems.
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