26 July 2010

Fantastic Rewards

Let's look at explanations for the forex market, given in a few words, like the dollar is down because risk is on less demand for it etc. What happens is you see-saw from risk on risk off explanations and try and make predictions which go ever so slightly wrong wrong.

The forex market explanatory process becomes like Graham's memorable description of Mr. Market. The call for $ and US equities to be in sync has long been forgotten.

But how could it be anything but while that extraordinary conduit directs money flows into Euro when $ is buried by low interest rates, even as the economy starts to rise again.

That cash coming into the market is from cheap dollars, it is not investing, it is not a risk trade, it is pure flow. The money ebbs out when it seems there is no future for it, the money comes back when it seems that business as usual will continue (that definitely includes the prospect of renewing mortgage based asset inflation). But the source is the long term destruction of the greenback.

Of course Euro rises, doing this makes the Euro seems comparatively rosy when it is fundamentally anything but. That real recovery is needed. The US plays fast and loose with its monetary policy, because it can. But why not practice sound fiscal policy, like so many other countries can and do.

The US would reap the most fantastic rewards for doing this. In many ways the US is still structurally like a developing economy, and it is already an economic superstar. I'm saying this because Obama wants to do this.

Doing this will unleash the power of the US economy, which has been in fiscal chains for decades. Not because of tight soviet style policies, but because of loose policies beginning with Volcker.

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