Sunday, March 22, 2009

Big Ben's European vacation

Isam Laroui highlights a great speech by Bernanke back in 2002; as Isam points out, one could easily forecast Big Ben's actions since mid 2007 from reading this speech as Big Ben has been kind enough to follow the very playbook he laid out back then. Setting fed funds rate to zero? Check. Cheap money to the banks? Check. Lowering long rates? Check (well, partially - we still haven't seen an artificial cap on rates or a formalized promise to keep overnight rates at 0).

The real doozy though from reading Big Ben's speech is his introduction of the possibility of buying foreign debt in addition to Treasuries. Well, now we're getting serious. This is an option that you hear very little about but has the potential to completely crush what's left of the dollar. A quick look at forward rates tells me that this isn't being fully priced into the market. Much like last week's FOMC movements, once again we're seeing the markets underestimate Big Ben's will to fight our way out - aggregate demand will be filled by the Fed whether we like it or not, and you better get in front of that market movement if you don't want to get squashed.

To clarify - is it likely the Fed will turn to buying foreign debt? As an event, probably not - it's basically a battle cry for a fight to the bottom and there would be other political issues tied up in there. However, with the potential impact of such a move, it's an expected value event to keep an eye out for. Sphere: Related Content
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10 comments:

James said...

he is crazy. there is no doubt about it.

Anonymous said...

>Much like last week's FOMC movements, once again we're seeing the markets underestimate Big Ben's will to fight our way out - aggregate demand will be filled by the Fed whether we like it or not, and you better get in front of that market movement if you don't want to get squashed.

The market believes that the Fed governors won't go as far as Bernanke wants because they will be afraid of social unrest at the levels of the detroit and newark riots of 1967. Arson and mayhem. Real fight club.

Advant Guard said...

Isn't the whole buying foreign debt exactly what the Swiss National Bank has already done? If we are running a race to the bottom, the Federal Reserve is running next to last (thank God for the ECB.)

Anonymous said...

Has full rss been turned off?

Anonymous said...

Poor old Benny everytime he starts devaluing the dollar the markets fronrun him, launch the commdities market into orbit with falling demand, stagnat and falling wages, over indebted consumers who cut back spending more making the deflationary spiral worse.

Ya gotta love it.

Cornelius said...

Advant, yes - the Swiss did it a couple of weeks ago and the markets roiled a bit because there was the expectation of that race to the bottom.

However, the potential of the Fed doing it is in a completely different league. The trade flows for Switzerland are ridiculously puny compared to USD vs. its top 5 trade partners. Additionally, the dollar's status as reserve currency and the currency in which gold/oil are denominated in means that there will be tremendous movement. You can be sure the Japanese will follow with counter measures and the ECB won't be far behind. Game theorists out there will suddenly become the next great macro investors.

S said...

thoughts on implications of swap lines? Seems the fed has already tried to enforce an atlantic alliance of sorts via these lines. the hang together meme.

OhmeOhmy said...

Cornelius, who signs you check for all this blogging work JPM or MS?

Anonymous said...

This is a joke, right?

vachon

Anonymous said...

Big Ben has more than one thing going for him.

Hollywood baby!

http://tinyurl.com/djcsty