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The Fed's Most Dangerous Game: Checkmate

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http://www.zerohedge.com/article/guest-post-feds-most-dangerous-game-checkmate

The Fed's Most Dangerous Game: Checkmate

The Fed can only choose the least-worst option now: either destroy the real economy by sinking the dollar below support and unleashing the Inflation Monster, or abandon the "risk trade" stock market rally.

The Fed's game plan--sink the U.S. dollar to goose corporate profits, reinflate asset prices and create "modest inflation"--is now the most dangerous game on Earth. As overleveraged assets from real estate to stocks imploded in 2008 and early 2009, the Federal Reserve rushed to flood the global economy with zero-interest dollars. This did a number of things the Fed reckoned were necessary:

1. It gave U.S. banks and other insolvent financial institutions an unlimited pool of money to borrow at zero interest and leave on deposit at the Fed, where it earned risk-free interest.

2. It enabled a vast global "carry trade" in dollars: speculators could borrow unlimited dollars at no cost, and then deploy the cash around the world to chase higher yields in stocks, commodities, etc.

3. It allowed banks to lend profitably in the U.S., as their cost of money was reduced to essentially zero, and to pour "hot money" into U.S. stocks, creating a virtuous cycle of ever-rising equity prices.

4. With the bulk of U.S. corporations' growth and earnings coming from overseas sales, then a plummeting dollar boosted their profits effortlessly, further goosing U.S. stocks.

5. With savings earning nothing, U.S. investors were driven into the "risk trades" of the stock market and commodities, a flow of funds which reinflated asset bubbles. This reinflation was critical to foster the appearance of widespread "recovery" via the "wealth effect" of rising asset prices.

6. A rising stock market not only offered an illusion of "growth" but it bailed out pension funds and set the stage for Wall Street to reap billions of dollars from the resurgence of mergers and acquisitions, IPOs and derivatives.

The basic idea was to extend the game plan which had worked in the last banking crisis in the early 1980s: don't force the banks to declare their losses, but "extend and pretend" while offering them risk-free ways to bank billions in profits. The goal was to enable the banks to recapitalize "painlessly" on the backs of consumers and taxpayers.

The other goal of the plan was to create some modest inflation by brute-force depreciation of the nation's currency. This inflation would be "good" because it would enable debtors to pay off their debts with cheaper dollars, and it would also serve to reinvigorate the "animal spirits" of borrowing and spending the Fed views as the bedrock of the "permanent growth" economy.

If you're confident that your cash will be worth less next year, you're highly incentivized to spend it now rather than see its purchasing power decline.

But in choosing to depreciate the dollar, the Fed engaged in a high-stakes game with potentially devastating consequences. By pushing the dollar down to near-historic lows, the Fed now risks a destabilizing criticality: if the dollar breaks key support levels, then traders and holders everywhere will have great uncertainties about how low it might drop. That will encourage them to sell their dollars immediately rather than hold on to find out how low it might fall.

As we can see in this chart, the dollar's decline has not occurred in a vaccum: when the dollar declines, oil and gasoline shoot up. The dollar and oil (and other essential commodities) are on a see-saw, for oil exporters simply raise prices to compensate for the loss of purchasing power as the dollar declines. (Chart courtesy of dshort.com.)

The Fed is now trapped: if it crushes the dollar any lower, then oil will jump toward its 2008 highs around $140/barrel--a level that triggers recession in the "real" U.S. economy. A recession will disembowel the "recovery" and all the rest of the Fed's carefully nurtured props of "prosperity."

The unintended consequences of the Fed's inflationary plan to depreciate the dollar is evident everywhere in skyrocketing food and energy costs. Destroying the dollar has sparked destabilizing global inflation which threatens to spin out of control.

But if they let the dollar rise, then their precious stock market rally implodes. And what's left of the mirage of "recovery" if the "wealth effect" evaporates? Zip, zero, nada.

More at the link.

Some interesting points here. The stock market is all important as the baby boomers pensions have been tied to it. A strong stock market is needed to pay the pensions of the boomers, the Fed clearly wants to try and deliver that promise.

At least all this manipulation shows what a great sustainable recovery we've got.

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http://www.zerohedge.com/article/guest-post-feds-most-dangerous-game-checkmate

More at the link.

Some interesting points here. The stock market is all important as the baby boomers pensions have been tied to it. A strong stock market is needed to pay the pensions of the boomers, the Fed clearly wants to try and deliver that promise.

At least all this manipulation shows what a great sustainable recovery we've got.

It seems to be a very clear eyed view of the strategy implemented.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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