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The Dollar to Get Caught in the Grip of Fed's Tightening

By    |   Monday, 22 Feb 2010 03:04 PM

What is really difficult about being an out-and-out contrarian like I am is that so much that the mainstream believes in is usually at the end of a move or just flat-out wrong.

For example, right now because of the Federal Reserve's recent boost in its discount rate (to 0.75 percent from 0.50 percent), people are acting is if the Fed is for a strong dollar and trying to fight inflation.

The real reason behind the Fed’s increase in the discount rate is because it does not want banks to be so dependent in borrowing cheap money from the nation's central bank. The Fed want banks to lend to each other.

In the past, rising rates has meant a tight monetary policy.

However, starting in the 2000s, this ended. The Fed raised rates from 2004 to 2006, but it still kept the monetary base loose by printing money the whole time.

The Fed is behind the curve. The yield on the 10 year bond has nearly doubled from 2.03 percent in December 2008 to 3.78 percent.

The Fed is way behind. The long term bond has already started up and because the Fed owns so many interest rate sensitive securities (mortgage backed securities, etc…), I do not see the Fed raising rates in a quick manner.

We must remember that due to the huge government debt being run up, the powers that be want inflation so they can inflate this debt even more.

Much has been made of the PIIGS in Europe (Portugal, Ireland, Italy, Greece and Spain) and their debt troubles. A short term problem is that these countries are being forced to meet euro guidelines of reducing debt to less than 3 percent of GDP and cannot print their own money.

In the long run, this is, of course, much better for these countries. In the short run, the U.S. can print its money and run up all the debt it wants to.

Ironically, this flexibility and bad fiscal policy is causing short term strength in the dollar.

Of course, trying to get your fiscal house in order is much more positive in the long run. I expect that after this short- to intermediate-term weakness, the euro will again climb against the dollar.

What you are seeing in regard to Greece and Portugal is going to happen in the United States within the next three to five years.

The U.S. will never default on its debt, but it will print money to deal with it.
This scenario with massive printing of money will ultimately lead to a much lower U.S. dollar.

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DavidSkarica
What is really difficult about being an out-and-out contrarian like I am is that so much that the mainstream believes in is usually at the end of a move or just flat-out wrong. For example, right now because of the Federal Reserve's recent boost in its discount rate (to...
david,skarica,fed,dollar
433
2010-04-22
Monday, 22 Feb 2010 03:04 PM
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